Austere, realistic budget

Austere, realistic budget

The 1996-1997 state budget which President Soeharto proposed
to the House of Representatives (DPR) yesterday is qualitatively
and structurally very similar to the current one. The spending
plan reflects a conservative fiscal policy. That is fully
consistent with the tighter monetary policy which was introduced
last month to cool off the overheating economy.

The 16.1 percent nominal increase or a seven percent rise in
real terms (adjusted for last year's inflation) in the budget
volume cannot be seen as a significant expansion. In fact, its
expansive impact on the domestic market demand would likely be
small since about Rp 19.93 trillion (US$8.6 billion) or 22
percent of the proposed total spending will go to the repayment
and servicing of foreign debts and another Rp 47 trillion or 52
percent of the total spending will be taxes collected from the
people.

However, the realistic assumptions used for formulating the
budget provide the right signal to the market and leave us
reasonably assured that there won't be any drastic, bitter
measures needed to achieve the budget target. Such assurance is
vital especially for the business community whose investments
will be the engine of the 7.1 percent economic growth planned for
this year.

On the revenue side, the structural composition will become
stronger as the proportional role of oil and natural gas, which
tend to fluctuate, will further be reduced to 22 percent. The
23.7 percent rise set for income tax receipts, compared to an
increase of a mere two percent in the current budget, is
realistic. After one year of experience in enforcing the new
income tax law of 1995, tax officials are expected to be more
capable of significantly broadening the tax base and intensifying
tax collection. After all, one of the primary objectives of the
lowering of the tax rates, as stipulated in the new income tax
law, is to encourage tax compliance.

The Rp 7.2 trillion in non-tax revenues reflect a better
management of state assets and of the service fees collected by
the various government agencies. Only Rp 1.8 trillion of the
total is expected to come from dividend payments from state
companies while the remaining Rp 5.4 trillion will be derived
from service fees.

The proportion of foreign loans will also decline to a mere
13.7 percent of total revenues though they will still account for
around 36 percent of government investment.

The spending account continues to follow the top development
priorities in the sense that the biggest sectoral allocations
will go to the development of the provinces and physical and
human resources such as roads, electricity, education.

Neither the budget proposal nor the President's budgetary
address specifically mention any increase in the civil service
and armed forces pay but the 19 percent rise budgeted for
expenditures on government personnel indicate a probable across-
the-board increase in the civil service salaries. The current
budget which started last April raised the civil service pays by
10 percent.

The most worrisome aspect is the external balance. Though the
current account deficit of the balance of payments is estimated
to decline from $7.9 billion in 1995-1996 to $6.8 billion or 3.1
percent of the gross domestic product in the next fiscal year,
the estimate assumes a private capital inflow of $9.7 billion
through foreign direct and portfolio investments and private
borrowings.

That assumption is both challenging and precarious. It is
challenging because it calls for a 19.5 percent increase in
exports of non-oil products and a sharp decline in import growth
from 32 percent last year to 11 percent. It is also precarious
because it expects a big private capital inflow through direct
and portfolio investment. We reckon that the proceeds of one or
two initial public offerings by state companies on international
stock exchanges have also been included in the estimate of the
capital flow.

The capital flow target requires more concerted efforts to
improve the investment climate and that in turn calls for new
packages of deregulation measures and bureaucratic reform. In the
meantime, the domestic interest rates should remain much higher
than those overseas, and the domestic stock exchanges need to
improve the quality of share issues and the efficiency of
transactions and to strengthen the rules of the game in order to
attract portfolio investments.

Hence, overall the budget proposal will provide the right
signal to the market but the conservative monetary and fiscal
policy itself is not adequate to cope with pressures on the
external balance. A new package of wide-ranging deregulation
measures and bureaucratic reforms is imperative to attract direct
and portfolio investments.