Bare-bones budget

Bare-bones budget

The draft state budget for the 1998/1999 fiscal year beginning
in April will have a contractive impact on the domestic market as
government investment will decline in real terms by about 5
percent, while most of the 48.6 percent increase in the operating
budget will go to servicing the foreign debts. Such a tight
budget, already predictable in view of the financial crisis, will
make this year a very tough one since the private sector -- which
has since the early 1990s become the engine of economic growth --
will likely remain depressed at least for the next 12 months.

The budget proposal, unveiled by President Soeharto to the
House of Representatives last night, still projects a 32.1
percent increase in total volume which is envisaged to balance at
Rp 133.49 trillion (US$19 billion at Rp 7,000 per U.S. dollar).
This projection, we think, is too optimistic.

True, oil and natural gas tax receipts are realistically
projected to increase by 83.5 percent to Rp 27.28 trillion,
assuming a 1.5-million-barrel average daily production, including
gas condensate, and an average export price of $17 per barrel.
Foreign loans are estimated to increase 98.1 percent to Rp 25.8
trillion, including Rp 6.8 trillion in quickly disbursed aid from
the World Bank, the International Monetary Fund and the Asian
Development Bank.

But the projection of only a 9.5 percent decline in income tax
receipts and a 13.1 percent rise in value-added tax receipts
seems highly optimistic, given the battered condition of most
businesses and the huge losses incurred by many big enterprises
as a result of the rupiah's steep depreciation. This could signal
excessively aggressive tax collection and audits which would
scare businesspeople.

The budget proposal projects a 4 percent growth in the gross
domestic product. This is also too optimistic because the state
budget will contract domestic demand, while private sector
investments, which used to make up more than 75 percent of the
nation's investments, will likely remain weak throughout the
year.

The 48.6 percent increase envisaged in the operating budget
will be negligible in terms of its impact on domestic consumption
since nearly 50 percent of the spending will go to servicing
foreign debts (Rp 30.24 trillion) and to subsidizing oil,
fertilizer and food prices (Rp 15.3 trillion). Moreover, almost
50 percent of domestic revenues will be derived from taxes,
excise duties and levies taken out of the taxpayers' pockets. Our
full sympathy should go to government employees and Armed Forces
personnel who will have to make sacrifices since they are not
slated to receive a pay raise.

The budget's projection of only a 9 percent inflation rate for
the next fiscal year also is not realistic despite large
appropriations for oil and food price subsidies. This could
provide a wrong signal to both the business community and
consumers. We think the government should bite the bullet and
raise the prices of wheatflour, electricity and oil as part of
the painful adjustments needed to face the dire economic
situation.

But the most questionable aspect of the budget is the
government's assumption that the rupiah's rate against the dollar
will average 4,000 between April, 1998 and March, 1999 --
compared to yesterday's rate of more than 7,000. This projection
seems too high because non-oil exports are projected to increase
only 13 percent to $49.25 billion, while oil exports are
estimated to decline 19 percent to $5.3 billion and natural gas
exports to increase 4.3 percent to $4.8 billion.

The bright side of the budget is the allocation of Rp 10
trillion, or 45 percent of total government investment, to
locally administered development projects in the provinces which
are usually labor intensive. This allocation could serve as a
social safety net for job seekers in rural areas.

All in all, the bare-bones budget is a realistic one, as
promised by President Soeharto last month, except for seemingly
too optimistic projections for revenues and the rupiah rate. But
the question remains whether the budget will provide the right
signal to the market or not. That, we think, will depend on
whether the budget will be enforced with a great sense of
efficiency, frugality and accountability.