Govt to apply retrenchment measures to limit deficit

The Jakarta Post, Jakarta

Minister for Finance Boediono said on Thursday the government would have to make further spending cutbacks to help keep this year's state budget deficit at a safe level.

"We'll have to apply retrenchment measures," he told reporters on Thursday.

Boediono did not elaborate, but said that budget spending on servicing the national debt this year should be lower than projected because of the stronger rupiah and the declining domestic interest rate environment.

He was responding to an earlier report suggesting that this year's state budget deficit could inflate beyond the targeted level of Rp 34.4 trillion (equal to 1.8 percent of gross domestic product), due to the higher cost of maintaining fuel subsidies.

The government has been determined to cut this year's budget deficit to 1.8 percent of GDP from 2.5 percent of GDP last year. For next year, the government plans to further limit the deficit at 1 percent of GDP in an effort to create a healthy fiscal condition, which is a crucial factor in instill stability in the economy, badly hit by the late 1990s Asian financial crisis.

The deficit projection was made based on the assumption that the government would erase subsidies on fuel products except kerosene, which is mainly consumed by lower income families. Under the initial plan, the budget was to only have allocated around Rp 13 trillion to cover the subsidy on kerosene. But widespread protests in January over plans to eliminate fuel subsidies forced the government to cancel the plan. At the same time, oil prices on the international market increased to an average price level of $26.5 per barrel, compared to the state budget assumption of $22 per barrel. This means higher spending on fuel subsidies, which according to the latest government calculations could increase to Rp 25.6 trillion.

Based on this calculation, after taking into account the windfall profits obtained from higher oil prices on the international market, the government will still suffer an additional deficit of Rp 5.5 trillion.

"That's why we'll have to institute these retrenchment measures," said Director General of Financial Institutions at the Ministry of Finance Darmin Nasution.

During the first half of this year, the government budget deficit was relatively low at around Rp 2.5 trillion, mainly because of slower progress in carrying out a number of government-funded projects.