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.