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.