A flexible budget needed to respond to changes

The government presented on Tuesday its draft budget for the 1999/2000 fiscal year. It balances at Rp 218.2 trillion (US$29 billion), a 17.3 percent drop from the current budget. Pande Raja Silalahi discusses the budget's value and its potential impact on the economy.

Question: What do you think of the budget proposed by President B.J. Habibie before the House of Representatives on Tuesday?

Pande: Looking at the 1999/2000 draft budget as a whole, some of its elements are too optimistic, some are realistic and others are pessimistic. Thus, the general perception of the draft budget is mixed.

Overly optimistic, I think, is the government's target on both income and value-added taxes, especially income tax, which is 57 percent higher than in this fiscal year's budget. In a contracting economy, or in an economy with zero growth, it is unrealistic to target increasing revenue from income tax. Even for companies which could really perform, they would not be able to book a drastic increase in income. Moreover, for companies suffering greatly in the crisis, they would not contribute anything to the government from income taxes because they would continue to book losses.

Nevertheless, I consider the assumptions used to draft the budget realistic enough. These include the zero growth for 1999/2000, inflation at 17 percent and the rupiah at 7,500 to the dollar. But, again, those assumptions are subject to change as they contain uncertainties. The rupiah's exchange rate, for instance, is prone to change because it is heavily influenced by psychology and perceptions on the currency.

But the government's revenue target for oil and gas is quite pessimistic, especially revenues from natural gas, because gas prices do not fall drastically and could rebound again at anytime.

And the big question mark surrounds foreign loans. Could we get that much (Rp 77.4 trillion)?

In this uncertain situation, what we need is a flexible budget. If a particular target could not be achieved, we would know exactly the spending in what sector needs to be cut. Conversely, if income suddenly exceeds projections due to improving oil or gas prices, for instance, we would also know what areas we have to push forward. These things need to be discussed by the House of Representatives, together with the government.

Q: What about the spending side of the budget?

P: I agree with the government's proposal to raise civil servants' salaries and cut subsidies, especially on fuels.

An increase in civil servants' salaries will be positive. Just look at inflation, which last year alone soared 77 percent. It significantly cut civil servants' real income. How can they work well to serve the people if their real income has dropped sharply? At the same time, this reform era demands no more corruption in the civil service. Even a 30 percent increase in civil servants' salary is still far from enough to improve their real income. That will remain a problem, anyway.

The reduction of fuel subsidies, I think, is a must. Although politically it is not good, economically it is welcome. The important thing is how to raise fuel prices proportionally so that it would not jerk up prices of related goods and services. Yes, price increases are normal consequences of the lifting of subsidies. We cannot eliminate this. But we can reduce the level of the increases or their impact on society through sufficient preparation. The problem is that we often eliminate subsidies without sufficient preparation. Most recent was the removal of the fertilizer subsidies, which caused political shocks.

Q: The reform government has again paid more attention to cooperatives and small enterprises in the budget. How does this work for the country?

P: We do have to empower small and medium businesses. And we have to side with them because so far the holding of productive assets has been dominated by a minority. This has destroyed the economy itself, and so we have to correct this imbalance. But we have to pursue this through market-friendly ways, not through a Robin Hood approach, stealing from the rich and giving to the poor. We have to be realistic by asking ourselves why the enterprises are small. We have to be honest on whether we can help them to become medium size, and then big and bigger. If we examine them realistically, we will see that one of their main problems is not bank interest rates, but the availability of bank credits. It is simple, actually. We can help them without giving them big subsidies on interest rates.

Q: Unlike in the previous years, the government now proposes a contraction in development spending from Rp 92.68 trillion this fiscal year to Rp 83.65 trillion. Do you think this meager amount is enough to stimulate economic activities?

P: It's difficult. The government's budget for development spending is actually even smaller, because the figure includes Rp 18 trillion set aside for the bank recapitalization program. Unquestionably, there is Rp 66 trillion left for real development spending. That is less than 10 percent of our gross domestic product, which is why the government is targeting zero percent economic growth for the 1999/2000 fiscal year. What is important now is how to spend every rupiah from the budget to stimulate economic activities. (rid)