Govt announces subsidy cuts, higher taxes for 2003 budget

The Jakarta Post, Jakarta

President Megawati Soekarnoputri unveiled on Friday the 2003 state budget draft, which highlights a sharp cut in subsidies and a hike in tax revenue, meaning further belt tightening for many Indonesians still suffering from the late 1990s economic crisis.

"In a bid to reduce the deficit next year, the government plans to cut fuel, electricity and food subsidies," Megawati said during the delivery of the draft before a plenary session of the House of Representatives.

The government proposes a 39 percent cut in subsidies to Rp 25.3 trillion (US$2.91 billion) for next year, compared to Rp 41.6 trillion allocated for the 2002 state budget.

The lower subsidies translate into higher fuel prices and electricity rates.

Megawati said the government would have to raise electricity rates by an average of 6 percent every quarter next year.

The cut in expensive subsidies is crucial to help bring down the state budget deficit to 1.3 percent of gross domestic product (GDP) from 2.5 percent estimated for 2002 in a policy aimed at achieving fiscal sustainability.

"The main goal we wish to achieve is more fiscal sustainability, which serves as the foundation for economic and monetary stability as well as a return of confidence that would in turn boost the production sector and result in more jobs," Megawati said.

Huge subsidies have put the government budget in the red. And since the economic crisis, which prompted the government to issue massive bonds worth about Rp 430 trillion to bail out ailing banks, the budget has sunk even deeper into the hole because it has to cover the interest rate of the bonds.

For 2003, Megawati plans to set aside some Rp 80.9 trillion for interest debt payment, of which Rp 55.1 trillion is allocated for servicing the domestic debt.

To help finance this huge public debt burden, Megawati also proposes an 18.7 percent hike in tax revenue to Rp 260.8 trillion.

The government hopes that a higher economic growth of 5 percent next year will help achieve greater tax revenue.

Nevertheless, in an apparent bid to win the hearts of Indonesians, Megawati offered some relief by pledging a 50 percent increase in teachers' allowances and a 10 percent rise in the salaries of civil servants, soldiers and policemen. The daily allowance for soldiers and policemen will also be increased.

State expenditures for the 2003 state budget are estimated at Rp 354.1 trillion, compared to Rp 344 trillion in the current budget.

However, because of the huge debt burden, only a little can be spared for spending on public works or other development programs to generate employment. Development spending is set at Rp 54.5 trillion or 2.8 percent of GDP. In comparison, spending for servicing the huge public debt next year is set at 4.1 percent of GDP.

Megawati said belt-tightening measures through the cut in subsidies and hike in tax revenue should allow the government to balance its budget by 2004.

To finance the state budget deficit, the government will continue to rely on foreign loans and proceeds from the privatization program and the sale of assets held by the Indonesian Bank Restructuring Agency (IBRA). Privatization and asset sales are expected to raise some Rp 16.9 trillion in cash.

Elsewhere, Megawati was hopeful that the economy would grow at a faster rate of 5 percent next year, compared to an estimated 4 percent for this year, which is being helped by an improving global economic condition.