An austere budget
The state budget proposal for the fiscal year 2003 will certainly be contractive on the economy because total spending in real terms will decrease by 6 percent and almost 20 percent of the already meager spending plan will go to servicing foreign debts and to price subsidies that will not create domestic market demand.
More direct and indirect taxes also will sap consumers' purchasing power, thereby reducing the capacity of private consumer spending as one of the two main locomotives of growth, besides exports.
The spending plan, like the current budget, still very much reflects the brunt of the economic crisis, with government investment (development spending) down 5 percent in real terms and routine spending contracting by almost 12 percent whereas appropriations for regional administrations will increase 6 percent.
The budget proposal will, however, make the market comfortable as it will emphasize fiscal consolidation by cutting the budget deficit down to 1.3 percent of gross domestic product (GDP) from 2.5 percent this year and by prioritizing spending on poverty alleviation and other public welfare programs such as health and education.
The assumptions for the factors that are most influential to budget estimates seem conservative, estimating GDP growth at 5 percent, inflation at 8 percent, the rupiah exchange rate at Rp 8,700 to the dollar, benchmark interest rate at 13 percent and international crude oil prices at US$20.5 per barrel.
The assumptions seem realistic, given the uncertainty about the world economy. It is indeed much better to err on the conservative side, rather than being too optimistic and then having to make painful adjustments.
The taxpayers should, however, further tighten their belt because electricity and toll roads will for the first time be subject to the 10 percent value-added tax beginning in January and property tax will increase as a result of the upcoming rise in the rate of taxable property value.
These heavier tax burdens will come on top of the 6 percent quarterly increase in electricity rates -- up by a total of 24 percent for next year. Smokers, who still account for quite a large portion of the population and who usually contribute 5 to 6 percent of total tax receipts, will also be further squeezed as the government will set tobacco duty by specific amounts, instead of on an ad valorem basis as it is now.
The biggest worry, though, is the 26.4 percent rise envisaged in income tax receipts. Though GDP will most likely expand to 5 percent from an estimated 4 percent this year, and the government argues that much of the increase will be generated by expanding the tax base, the business community and middle and top income earners will likely remain apprehensive.
Experiences so far have shown that every time the government intends to raise more tax revenues, it is the taxpayers already registered that are hit the hardest due to the inefficient and corrupt tax administrative system. Taxpayers have accused tax officials of taking the easy way out.
The 105 percent increase in revenue from privatization to as high as Rp 8 trillion is also highly doubtful, given the utterly poor performance in this program since 2000. The government had announced an annual list of dozens of state companies to be sold but very few of them have so far been privatized due to inadequate preparations, or resistance from managements and trade unions or opposition from inordinate nationalist elements in the House of Representatives.
The spending side of the budget shows some encouraging progress in fiscal management. The government will slash spending on subsidies by almost 39 percent and on debt servicing by almost 10 percent.
Domestic debt (bond) servicing will decline due to the early retirement of a sizable sum of government bonds and the decrease in the benchmark interest rate to 13 percent from an estimated 16 percent throughout this year.
Foreign debt service payments will decrease by Rp 32.3 trillion or almost 10 percent of the total spending plan thanks to the debt rescheduling agreement with the Paris Club of sovereign creditors.
It is worth reminding those who like to gain popularity by bashing the International Monetary Fund and blaming it for what they consider the mishandling of the economic crisis that the debt rescheduling was made possible only under the IMF extended facility to Indonesia.
As government investment will decrease by 5 percent in real terms, and consumer spending will likely weaken next year due to the heavier tax burdens and higher prices of public utilities and services, economic growth will rely mainly on export and domestic investment. Private capital accounts are predicted to suffer another net outflow of $4.2 billion.
But exports and domestic investment will never be able to play a bigger role without accelerating corporate debt restructuring to unleash the thousands of businesses from the hostage of their bad debts and by speeding up the sale of distressed assets and of state companies to allow new investors to transform these enterprises into sound, fast growing businesses.