Election-year budget

Election-year budget

The 2004 state spending program, proposed by President
Megawati Soekarnoputri to the House of Representatives on Friday,
is quite a bare-bones budget, packed in a boring budgetary
document.

But this is precisely the reason why the market will welcome
the budget as realistic. Even in the face of the general election
and presidential election next year, the government has wisely
refrained from introducing populist spending programs.

Total spending will instead decline by more than 6 percent in
real terms, due to a sharp rise in foreign debt. This is because
the government will no longer have access to the debt
rescheduling facility of the Paris Club (of sovereign creditors)
after the end of the International Monetary Fund program, later
this year.

Fortunately though, the domestic debt servicing burden will
decline by more than 16 percent, due to the steep decrease of
interest rates and inflation.

But fiscal consolidation will continue with the budget deficit
envisaged to decline to 1.2 percent of the gross domestic
product, or Rp 24. 9 trillion (US$3 billion), from 1.8 percent of
the gross domestic product this year. This is a positive signal
to the market and will further strengthen the foundation of the
economy.

The draft budget assumes that the economy will grow by 4.5
percent, inflation at 7 percent, the central bank's benchmark
short-term interest rate below 9 percent, the average
international oil price at around US$21/barrel and the rupiah
exchange rate at a band of Rp 8,200-8,900 to the dollar.

The conservative assumptions used for revenue and spending
projections will make the market feel comfortable that there will
not likely be painful surprises within the fiscal sector next
year, when the nation is likely to face a period of political
turbulence with heightened political emotions.

Except for the Rp 10 trillion (US$1.2 billion) target of
revenues from the sale of state companies -- which seems to be
overly ambitious, given the unfavorable political climate for
privatization next year -- most estimates for other revenues
appear realistic. For example, the 6.6 percent increase in tax
revenues is within reach and so is the target of non-tax
receipts, which will consist mainly of public service fees and
dividend payments by state companies.

Certainly, the budget will be contractive on the economy.
While total government spending will, in real terms, decline by
at least 6 percent to Rp 368.8 trillion, the government will take
out Rp 271 trillion from taxpayers' pockets. Moreover, around 10
percent of the total spending will have no impact on domestic
market demands, as it will go overseas for interest and principal
payments on foreign debts and foreign service.

However, the right priorities set in the budget for routine
and development (investment) spending will still have a
multiplier impact on the economy. The Rp 17.8 trillion
appropriation from the operating budget for the maintenance of
infrastructures will go a long way in improving economic
efficiency.

Likewise, the Rp 68.1 trillion investment spending budgeted
for next year seems well-targeted, as the bulk of it will go to
education, defense and security, transportation, agriculture and
irrigation as well as social welfare enhancement.

As the budget is entirely devoid of any fiscal stimulus, it
becomes even more imperative that the government stimulate
investment and consumer spending to achieve the growth target.

So all in all, the 2004 budget proposal should be welcomed as
a wise fiscal policy. The government should be hailed for the
emphasis it placed on the long-term good of the economy, rather
than its short-term political interests during the 2004 election
year.

But all these budget figures, however conservative they may
be, are simply estimates that have to be realized through
programs of action. Budget discipline has to be heightened to
ensure that all fees from public services are transferred to the
state coffers. The tax base should continue to be expanded to
increase revenues, without harassing businesses.

A good balancing act is necessary to ensure that dividend
payouts by state companies will not jeopardize their investment
programs to improve efficiency and competitive strength.

Trade-facilitation measures in regulatory environment,
licensing systems, transportation, port handling and customs
services, need to be stepped up to offset the additional costs of
business, caused by the increased security and business risks.

Certainly, a 4.5 percent economic expansion is far from
adequate to absorb the huge numbers of unemployed, let alone the
2.5 million new job seekers that enter the labor market every
year.

But the conservative, realistic budget will not only make the
market comfortable but will also further enhance market
confidence in the government's capability to manage the economy
after the end of the IMF program.