Government unveils conservative budget

JAKARTA (JP): President Megawati Soekarnoputri unveiled the 2002 draft state budget on Friday, which will require both individuals and businesses to pay higher taxes and more for fuel and electricity.

Megawati also cut spending by 2.3 percent of gross domestic product (GDP) in her first budget since assuming power in July.

"Drafting of the 2002 state budget has taken into account fiscal sustainability and domestic financing resources," Megawati said at a plenary session of the House of Representatives (DPR) when delivering the draft budget.

The 2002 draft budget assumes an economic growth rate of 5 percent, inflation at 8 percent, an exchange rate of Rp 8,500 per U.S. dollar, and an oil price of $22 per barrel.

The budget deficit is set at 2.5 percent of GDP, compared with 3.7 percent of GDP in the 2001 budget.

The January-December 2002 budget puts state revenue at Rp 289.4 trillion (about $34.05 billion), or 17.1 percent of GDP, compared with Rp 286 trillion, or 19.5 percent of GDP in the current 2001 budget.

Government spending is cut to Rp 332.5 trillion (19.6 percent of GDP) from Rp 340.32 trillion (23.2 percent of GDP), while development spending is set at Rp 47.15 trillion (2.8 percent of GDP), compared with Rp 45.46 trillion (3.1 percent of GDP).

Megawati said that fuel subsidies had to be reduced to Rp 32.29 trillion, compared with Rp 53.77 trillion allocated under the current 2001 budget, to help save money for financing development programs.

The subsidy cut will force the government to raise fuel prices, which Megawati said would increase by an average of 30 percent, possibly from January 2002.

She said that electricity rates would also have to increase by 3 percent to 4 percent every quarter next year.

Raising fuel prices is a politically sensitive move in the country. Former authoritarian president Soeharto was toppled in 1998 partly due to an increase in fuel prices.

"Cutting fuel subsidies is of paramount importance, otherwise we will have no money to fund development programs," Megawati said.

"There is no other choice except to increase the domestic price of fuel. This decision has clearly been a very difficult one, but we were forced to make it to maintain the continuation of our state budget," she added.

To minimize the burden of increased fuel prices on those in the low-income bracket, the government has earmarked Rp 2.2 trillion for "compensation programs," she said.

"With mutual cooperation and discipline to carry out a common commitment, we hope we can overcome our problems one by one and create a better future," Megawati said.

The budget will also force individuals and businesses to pay more in taxes, as the target for tax revenue in 2002 is increased to Rp 216.78 trillion from Rp 185.26 trillion.

"For the sake of efficiency and fairness, various tax holidays will be minimized," she said.

The government is also planning to impose value-added tax on goods such as video tapes, import tariffs on luxury goods such as cars and increase the retail price of tobacco by around 20 percent.

The spending contraction had been expected by many, as the government has to allocate a greater part of its revenue to service both foreign and domestic debt, thus contributing little to economic growth.

The government has allocated Rp 27.36 trillion for servicing foreign debt, and Rp 59.6 trillion for domestic debt.

"The government is trying to strike a balance between two main objectives: one is fiscal consolidation, and the other is to use as much as possible in our budget to stimulate the economy," said Finance Minister Boediono following the plenary session.

Megawati also vowed to accelerate the privatization program and the sale of assets controlled by the Indonesian Bank Restructuring Agency (IBRA), which had been criticized by the country's key donors as progressing very slowly.

"To accelerate economic recovery, the sale of assets and privatization of state-owned enterprises must be expedited," she said, adding that the government would also work to restructure private sector debt.

For the 2002 calender year, the government aims to rake in Rp 42.8 trillion from the sale of IBRA-held assets and Rp 6.5 trillion from the privatization of state-owned enterprises. More than half of the proceeds will be used to cover next year's budget deficit of Rp 43 trillion.

"IBRA will do its utmost to restructure assets under its disposal, and a portion of its proceeds will be used to redeem government bonds," Megawati said.

Meanwhile, Boediono said that the proceeds from privatization would not solely be used to finance the budget deficit, as happened in the past, but would also be used partly to redeem outstanding government bonds, in a bid to reduce the burden on the state budget in the future.

"We are proposing a policy whereby we will not use all (the privatization revenue) to finance the budget deficit. We will use some to repay domestic debt," Boediono said.

In the 2002 budget proposal, four sectors will receive a significant allocation of funds: education, national culture, youth and sports, with Rp11.552 trillion; agriculture, forestry, the marine and fishery sector as well as irrigation, Rp 6.6 trillion; transportation, meteorology and geophysics, Rp 6.464 trillion; social welfare, health and women's empowerment, Rp 4.304 trillion.(03/10)