Tax rise, subsidy cuts will weaken recovery: Report<\/p>\n
Dadan Wijaksana, The Jakarta Post, Jakarta<\/p>\n
The tax revenue increase and sharp subsidy cuts proposed by the
\ngovernment in the 2003 draft state budget could weaken the pace
\nof the country's economic recovery, a U.S. investment firm said.<\/p>\n
Merrill Lynch said in a report that an increase in the tax
\ncollection target and reduced allocation for subsidies would hurt
\ndomestic consumption, especially the private sector, which would
\nin turn would have a negative impact on economic growth.<\/p>\n
\"We expect private consumption, which contributes around 75
\npercent of GDP, to be the main driver of growth. However, the
\npace of consumption is likely to be moderate from here,\" said the
\nreport, a copy of which was made available to The Jakarta Post on
\nWednesday.<\/p>\n
Delivered by President Megawati Soekarnoputri, the government
\nproposed last week a 2003 draft budget which saw the tax revenue
\ntarget jump by almost 20 percent to Rp 260.8 trillion from this
\nyear's target of Rp 219.6 trillion.<\/p>\n
The draft also cuts subsidies on fuel, electricity and others
\nby 39 percent from Rp 41.6 trillion to Rp 25.3 trillion.<\/p>\n
The above measures will allow the government to reduce the
\nstate budget deficit next year to 1.3 percent of GDP from this
\nyear's estimate of 2.5 percent of GDP.<\/p>\n
\"We are encouraged by the government's focus on fiscal
\nsustainability, especially in reducing the budget deficit. While
\npositive in the long run, we believe this limits fiscal
\nflexibility and is also negative for growth,\" Merrill Lynch said.<\/p>\n
The subsidy cut will cause higher fuel prices and electricity
\nrates. This will weaken the purchasing power of households, and
\nthus lower consumer spending. The policy will create more burden
\non the business sector and thus limiting them to make new
\ninvestments.<\/p>\n
Merrill calculated that the fuel subsidy was expected to
\ndecline by 55 percent, which is likely to lead to a 20 percent to
\n25 percent hike in fuel prices.<\/p>\n
\"This alone may contribute some 2 percent to the overall
\ninflation,\" it said.<\/p>\n
The figure may get higher if coupled with increases in other
\nsectors, such as electricity.<\/p>\n
Commenting on other assumptions, the investment company said
\nthat, on the whole, the macro assumptions seemed realistic,
\nalthough the economic growth projection and revenue target fell
\non the optimistic side.<\/p>\n
The government assumes an economic growth of 5 percent,
\ncompared to this year's projected 4 percent, inflation at 8
\npercent, as against 9 percent this year.<\/p>\n
Merrill that although the budget expenditure was only to
\nincrease by 3 percent to Rp 354.1 trillion, it was more a
\nreflection of the steep decline in subsidies and interest
\npayments, which together account for some 30 percent of
\nexpenditure.<\/p>\n
Routine spending and allocation to local administrations (
\ncalled balance funds) are expected to increase by 24 percent and
\n16 percent respectively, the investment firm said.<\/p>\n
It said that balance or decentralization funds were by far the
\nlargest chunk of expenditure, and were expected to be one of the
\nmain drivers of the economy.<\/p>\n
\"The utilization of such funds is believed to be one of the
\nreasons behind the recent strength in private consumption
\nlocally ... strong pockets of activity in the resource-rich
\nregions. Such spending over time can trickle down to other
\nregions, thus providing a wider base for economic growth.\"<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/tax-rise-subsidy-cuts-will-weaken-recovery-report-1447893297",
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"sponsor": "Okusi Associates",
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