Budget realism welcomed

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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