A flexible budget needed to respond to changes

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)