Budgetary discipline

Minister of Finance Mar'ie Muhammad, one of the most respected technocrats in the cabinet, does not seem to care about politics. But the blunt reality is that fiscal policy is very much bound up in politics. Last week he told the House of Representatives the government would continue to pursue a contractive fiscal policy as a safety measure against inflationary pressures and the threat of a bigger current account deficit. This is quite a departure from the policy of many governments which loosen fiscal policy in election years. Indonesia will hold its general election in May 1997, and its presidential election in March 1998.

Although the law requires the annual state budget to balance at the end of each fiscal year, Mar'ie said the government would always endeavor to produce a sizable budget surplus by becoming more efficient. But the surplus will not be used domestically. It will go on early foreign debt payments, as it has done over the past three years.

Fiscal and monetary policies are the two main instruments a government uses to control the economy. Both policies are usually directly or indirectly linked. The main difference between them lies in the impact. Fiscal policy has a longer time lag than monetary policy.

Mar'ie said he did not want to slight the role of monetary policy but argued that a tight budgetary policy could serve as a safety net to cope with the current account deficit, which he believes has reached an alarming level. It has reached as much as 4 percent of Gross Domestic Product.

Mar'ie's policy stance does not differ much from the central bank's monetary policy. Bank Indonesia Governor Soedradjad Djiwandono earlier indicated that monetary policy must remain tight even though the overheating of the economy had eased.

However, with all due respect to Mar'ie and his perseverance in acting on what he preaches, we should concede that many elements of a tight fiscal policy remain beyond the finance minister's control. Take the state budget which is one of the main components of fiscal policy. Mar'ie conceded at a meeting with the House of Representatives last week the government had yet to improve its budgetary discipline.

The vigorous discourses between Mar'ie and the House Budgetary Commission show how Mar'ie often has to deviate from his policy stance to meet the various ministries' competing interests. We think Mar'ie fully shares the House members' view that all state revenues should be accounted for in the state budget. But the hearing revealed how Rp 50 billion of the estimated Rp 288 billion the government received from coal mining royalties had been transferred to the Minister of Mines and Energy's account and not to the state treasury, the repository for state budget funds.

True, as the finance minister says, the use of state funds outside the state budget is always subject to audit. But the problem, as far as fiscal policy is concerned, is the huge amount of the public sector spending outside the state budget. The coal mining royalties are the tip of the iceberg. Previously, House members questioned the use of millions of dollars derived from forest royalties. A portion of the huge forest royalties is being used by state aerospace company PT IPTN, Bandung.

We are afraid there are still many other levies and service fees or user taxes which are being collected by various government agencies but remain outside the state budget and beyond the House of Representatives' control. Every government office seems eager to have its own cash cow. Mar'ie obviously needs the cooperation of all government agencies to improve budgetary discipline and make fiscal policy really effective in achieving its objectives.