Budget realism welcomed

The 2006 state budget that was approved by the House of Representatives on Friday -- one working day before the deadline set in the Law on State Finances -- is significantly different from the spending plan initially proposed in mid-August. The changes are, however, for the good of fiscal management and a better economic outlook because the revenue and expenditure estimates are based on more realistic assumptions on key sectors.

The government and the House agreed to an assumption of the average oil price at US$57/barrel (compared to the $40 in the initial proposal), average rupiah rate at Rp 9,900 to the American dollar (Rp 9,400), interest rates at 9.5 percent (8 percent), inflation at 8 percent (7 percent) and economic growth at 6.2 percent (6.2 percent).

The market will surely be much more comfortable with the new assumptions as they are more realistic. The budget figures show that the total amount of money the government will spend will be closely aligned to what is affordable, and therefore there would not likely be any painful surprises within the next fiscal year beginning in January.

The upward revision of the forecasted average oil price to $57/barrel is quite strategic because higher-than-estimated prices as the one this year created a chain of severe shocks to state revenues, the rupiah exchange rate, interest rates, spending on fuel subsidies and social-safety net programs.

The more realistic assumption of oil prices will assure the market that the overall economic condition, including the rupiah exchange rate, next year will likely be much more stable for doing business. There will not likely be any "shocking" reform measures that have to be hastily implemented next year.

The slashing of the fuel subsidy will enable the government to allocate more funds for education, health services, poverty alleviation programs and rural infrastructure development.

Barring any unforeseen events beyond the government's control like the devastating earthquake and tsunami in northern Sumatra in December 2004 and other smaller natural disasters this year, the government will be able to concentrate on concerted efforts to generate momentum for stronger economic recovery.

The 2006 budget also will be able to "prime the economic pump", as total expenditures will reach almost Rp 645 trillion ($64.50 billion), a 20 percent nominal increase from the original proposal. Even in real terms--adjusted for inflation that is estimated to reach 12 perent this year-- the spending increase will still be be quite significant, especially because the bulk of the additional spending will be spent directly on poverty alleviation.

The Rp 5 trillion in additional fiscal stimuli that the House approved for next year will be a great boon for domestic market demand at a time when high inflation is eroding the purchasing power of most consumers.

Nevertheless, of most importance is the stronger market confidence in the outlook of the economy thanks to the predictability provided by the more realistic budget plan. And predictability is quite important for efficient and effective implementation of policies and programs because the public sector will perform better where there is stability in macroeconomic and strategic policies as well as the funding for the existing policies.

Moreover, a budget system is a communication system, conveying signals about behavior, prices, priorities, intentions and commitments. Encouraging to know that the 2006 state budget will follow the principles of sound public expenditure management as it links current and capital expenditures.

The market confidence that will be generated by the realistic spending program will contribute greatly to stimulating investment, which is badly needed to generate the 6.2 percent growth target for next year because the growth rate of consumption, the prime mover of the economy since 2000, is declining.

While 6 percent is not a magic number, economists and policy makers generally agree that it is the minimum necessary to create enough jobs for the 2.7 million new entrants into the job market and to reducing poverty.

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