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.