Govt announces subsidy cuts, higher taxes for 2003 budget

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.