Urgent fiscal policy tasks for RI<\/p>\n
By J. S. Uppal and Sukanto Reksohadiprodjo<\/p>\n
YOGYAKARTA (JP): The revival of the Indonesian economy from
\nits recent crisis will depend on whether the government takes
\nimmediate and important steps to deal with the crucial fiscal
\npolicy issues highlighted in this article. Any further neglect
\nwill be harmful for economic stability and financial
\nsustainability.<\/p>\n
Economists sometimes make budgets sound technical, using
\ntheoretical jargon. Governments often use different accounting
\ntricks to make them politically acceptable.<\/p>\n
The term used to describe the latter way to present a budget
\nis called "budget trickery", and the government of Indonesia has
\nbeen doing exactly that for many years. While the government's
\nbudget has been clearly in the red, it has been presented to the
\nnation as a balanced budget as per constitutional requirements.<\/p>\n
Rather than simply taking the difference between domestically
\nraised resources from taxes and oil\/gas revenues and total
\ngovernment expenditure as a true indication of the budgetary
\ncondition -- surplus or deficit -- the government covers up the
\nactual yearly deficit by ever-increasing foreign borrowing.<\/p>\n
As a cash flow device this may be justified, but it also
\nreflects the reality of the government's chronic inability to
\nraise sufficient domestic revenues to meet its expenditure.<\/p>\n
While the magnitude of the real deficit depends on how one
\ncalculates and presents it -- there are different figures ranging
\nfrom 4.5 percent to 7.5 percent of the gross domestic product
\n(GDP) -- there is no denying the fact that the nation is in a
\nstate of fiscal distress.<\/p>\n
The government revenues, particularly tax yields, are lagging
\nseriously behind mounting government expenditure and the nation
\nis increasingly dependent on foreign borrowing to make ends meet.<\/p>\n
The tax system is riddled with many budget loopholes designed
\nostensibly for administrative purposes, but really to benefit
\nupper-income people.<\/p>\n
The tax system has thus been seriously eroded. The tax base
\nhas been narrowed further by massive tax evasion through
\nconcealing incomes through noncompliance.<\/p>\n
We discussed the sad state of Indonesian taxes in an article
\nin The Jakarta Post on Oct. 27. Suffice to say here only 1
\npercent of our population is even registered as income tax
\npayers, and only about half of them even care to file tax returns
\nfor paying income tax based on voluntary compliance .<\/p>\n
A massive amount of tax liability stands uncollected and the
\nrate of tax delinquency has recently increased. Value-added tax
\n(VAT), dubbed the "money machine" due to its high revenue
\npotential, has lost much of its steam as a result of changes
\nintroduced after lobbying by businesspeople.<\/p>\n
Against this shortfall in tax revenue, government expenditure
\ncontinues to increase. Without drastic cuts in routine and
\ndevelopment expenditure, including reducing subsidies on basic
\ngoods introduced to help the poor, public outlays will continue
\nto grow.<\/p>\n
Since the recent popularly-elected government has been
\nespousing the cause of poor and needy, it cannot easily reduce
\nsubsidies or trim down the size of the government work force to
\nreduce government expenditure.<\/p>\n
This means that unless the government raises tax revenues by a
\nsubstantial amount, it will continue to face serious fiscal
\ndistress with a continuing dependence on foreign borrowing.<\/p>\n
There is a serious need for the nation to ponder over this
\nvital question. How long and how much can it depend on capricious
\nand uncertain foreign borrowing just to keep its government
\nrunning?<\/p>\n
The government should not lose sight of some serious
\nimplications of the continuing budget deficit: inflation, an
\nadverse balance of payments and depreciation of the foreign value
\nof money. All these factors can also lead to the downgrading of
\nthe credit rating of the country's bonds and other commercial
\npapers in the world markets. There is an urgent need to
\nrestructure the Indonesian tax system and scrutinize thoroughly
\ngovernment expenditure.<\/p>\n
In a hurried attempt to pacify the demands for autonomy from
\nthe provinces on the eve of the last elections, the government
\npassed laws aiming at political and fiscal decentralization
\nstarting in 2001; not too far away from now.<\/p>\n
The legislation contains only very broad outlines of the
\nfiscal relationship between the central and local governments.
\nThe sources of self-raised revenues for the local governments
\nhave been mostly left undefined.<\/p>\n
There is a broad provision for 25 percent of the central
\ngovernment resources to be allocated to local governments,
\nwithout any specific formula for intergovernmental resource
\ndistribution.<\/p>\n
Some resource-rich provinces will be able to claim as much as
\n80-85 percent of their income from their natural resources.
\nResource-poor provinces have been assured balanced development,
\nhowever there is no mention where the resources are going to come
\nfrom.<\/p>\n
Most of the central government's present functions, along with
\nits financial resources and personnel, will be transferred to
\nlocal governments, but no details have been worked out as yet in
\nthis respect.<\/p>\n
People will be able to elect local officials who will raise
\nthe people's hopes and expectations for a better life and more
\ncontrol over their local affairs. But they will not know where
\nthe necessary resources will come from.<\/p>\n
In short, in 2001 when the decentralization process will
\nstart, Indonesia will find itself in serious financial chaos if
\nall the necessary details are not worked out well in advance.<\/p>\n
Fortunately, however, Indonesia can benefit from the
\nexperience of other federal systems with varying amounts of
\nadministrative autonomy.<\/p>\n
Regions in the United States have a high level of autonomy, so
\nmuch so that each of the more than 85,000 local governmental
\nunits -- states, cities, towns, villages, school districts --
\nhave their own taxing and spending powers.<\/p>\n
On the other hand, Canada, India, Australia and other
\ndemocratic federal governments have well-defined and clearly
\ndemarcated taxing and expenditure powers, vested in different
\njurisdictions.<\/p>\n
However, all these federations have a well laid out mechanism
\nfor the distribution of central resources amongst local
\ngovernments. Indonesia can pick and choose from these
\nfederations, depending on its region's political and economic
\nenvironments.<\/p>\n
Indonesia should start right away to formulate policies to
\ndeal with the forthcoming decentralization. Otherwise, it faces
\nimpending chaos.<\/p>\n
J. S. Uppal Ph.D and Sukanto Reksohadiprodjo Ph.D are
\nprofessors of economics at the State University of New York,
\nAlbany, New York, and Gadjah Mada University, Yogyakarta,
\nrespectively. This article is based on their continuing research
\nfor the Sustainable Indonesian Growth Alliance, a United States
\nDevelopment Agency (USAID) and Gadjah Mada University Project.<\/p>\n
Window: People will be able to elect local officials who will raise
\nthe people's hopes and expectations for a better life and more
\ncontrol over their local affairs. But they will not know where
\nthe necessary resources will come from.<\/p>",
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