Draft state budget: Not just muddling through again

Draft state budget: Not just muddling through again

Julia Puspadewi Tijaja, Centre of Strategic and International
Studies (CSIS), Jakarta

Our economy, for once, seems determined to permanently recover
from the 1997 crisis. The 2004 state budget drawn last week
received the majority's welcome for its conservative yet
realistic approach.

Macroeconomic indicators have shown noteworthy improvement, and
the white paper that would include our post-IMF measures for
economic reform is nearly complete.

With the IMF program ending in a few months' time, our
government will be left with financing and a credibility gap. The
draft 2004 state budget shows our government's determination to
reduce the deficit -- and to reach a balanced budget by 2005 --
by tightening the belt.

With this commitment supported by both economic and non-
economic stability, the government is hopeful of regaining the
market confidence that we truly need.

Yet, even this attempt has been protested by some factions in
the legislature for its lack of fiscal stimulus in more
productive area. Cries ranging from higher pay for civil servants
to higher development spending were heard, hopefully as an
expression of their genuine concern for civil servants' well-
being and not for populist -- a common pre-election syndrome --
reason. None of them seem to realize that an increase in any
portion of spending requires a trade-off from others, as
government revenue is constrained.

The concern over growth is not to be dismissed; neither should
we forget that government spending only accounts for a small
fraction of our gross domestic product. Fiscal stimulus is not
the only way to enhance growth, and definitely not at times of
high deficit. Growth could also be stimulated from the private
sector. However, that would direct us to the credibility gap
problem.

The government's ability to finance its deficit as in the
proposed 2004 state budget does not seem to suggest any clear,
long-term focus. Issuance of foreign bonds as long-term debt
instruments, should never be seen as an easy way out. The value
of these bonds depends on the performance of our economy in the
long run. If we are apathetic towards this fact, these bonds will
serve as another time bomb for our economy by the time they reach
maturity.

Lower deficit, moderate inflation, low interest rates and a
stronger exchange rate are indicators of stability, which should
serve as a foundation for growth. Thus, the government should
never attempt to undertake measures simply for the sake of fine-
tuning the economy.

This usually means adjusting the economic components within
certain bands, but neglecting real adjustments. Surely, the
people would not cheer for another phase of growth built on a
vulnerable economic foundation.

A vivid example is the case of debt repayment. It will not
solve the real problem if we are to repay our debts by incurring
additional debt. We know that the real burden of debt is the
lower level of capital stock that the country will have in the
long run.

So, economists should not only be concerned with repaying
these debts, but also be concerned about building a national
economy that no longer relies on debt financing. This could be
done through effective taxation and direct investments.

Taxation is a highly potential, yet currently idle, source of
government revenue. Increasing the tax base -- rather than the
tax rate -- should be followed with an effective and strict tax
collection system. An incorrupt administration, transparency and
minimal bureaucratic red tape are, of course, the invariable
prerequisites for enforcing taxation as a real and sustainable
source of revenue.

The need for foreign direct investment has been realized by
introducing tax breaks, reducing costs of investment and easing
investment procedures. They are good initial steps, but improving
the investment climate would require accountable and committed
follow-up measures.

The clear protection of property rights, sustainable
utilization of our natural resources and formulation of
investment policies that are sensitive towards environmental and
societal needs should be our long-term focus. Once these have
been implemented, we will succeed in attracting and maintaining
foreign direct investment.

A lower future lending rate, as suggested by some elites, is
undeniably encouraging. A smaller gap between the lending and
deposit rates will help reduce the problem of disintermediation
-- the inability or ineffectiveness of financial institutions to
channel the funds deposited with them -- mainly due to low demand
for loans. Financial institutions need to keep in mind, however,
that channeling of funds should not be made solely for the
purpose of seeking profit.

It is common to find that financial institutions are more
willing to channel funds for high-risk consumption and property
loans, rather than working capital loans for small and medium
entrepreneurs. The people's economy should be built from the very
bottom of the economic ladder, thus small and medium
entrepreneurs should be supported and encouraged to flourish.

There is no doubt that the realistic draft 2004 state budget
would help the government maintain the reform momentum and
provide the badly needed stability throughout the election year.
But in the long run, we cannot afford another muddling through.
The current stability is imperative for luring investors back to
the country. Yet, investors would only be attracted to a strong
economy with a clear and focused vision.

Let us hope that the upcoming blueprint of economic reform
will be able to win the hearts of economic actors. A long-term
economic interest in enhancing the people's standard of living
should not be sacrificed for mere populist decisions that would
be disadvantageous in the future.

The writer is currently studying for a degree in economics and
politics at Queen Mary, University of London, England.