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.