Govt to apply retrenchment measures to limit deficit

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.