Govt unveils draft budget with political nuance

Dadan Wijaksana/Fitri Wulandari The Jakarta Post/Jakarta

President Megawati Soekarnoputri, facing a runoff battle on Sept. 20, unveiled on Monday the 2005 state budget draft, which promises higher growth, a lower deficit and a rise in the fuel subsidy, all of which some economists see as unrealistic.

The proposed budget projected economic growth of 5.4 percent in 2005 from an expected 4.8 percent this year. It also projected that deficit would decline to 0.8 percent of gross domestic product from an estimated 1.2 percent of GDP this year.

The targets are based on the assumption that oil prices next year will average US$24 per barrel, which some say is overly optimistic given that oil prices are currently at record levels of more than $45 per barrel and no one can say when the prices will peak.

Standard Chartered economist Fauzi Ichsan, Chatib Basri of the University of Indonesia and Iman Sugema of the Institute for the Development of Economics and Finance were unanimous in their opinion that the targets were unrealistic and driven by political motives ahead of the runoff.

"They (the government) are pushing optimism to the limit. But we need more concrete evidence of that optimism," Fauzi told The Jakarta Post on Monday, adding that the budget had a political flavor as the current administration was seeking reelection.

"Politically, it is difficult for Megawati to say that the global economy is unfavorable for our economy. She has to be as equally optimistic as SBY, who has promised a better economy," Fauzi said, referring to Susilo Bambang Yudhoyono, who is leading Megawati in all of the opinion polls ahead of the runoff.

It is feared high oil prices will derail the global economic recovery, which in turn would hamper the country's exports, a crucial factor in accelerating economic growth.

"This is politics. There is a good possibility there will be a revision. This draft has to remain open for the next government to make some adjustments.

"That includes Megawati. If she is reelected, she will have to be brave enough to make some revisions," Chatib said, adding that aside from some of the basic assumptions, the tax revenue target and the fuel subsidy could be revised.

Chatib and Fauzi agreed that it would be extremely difficult to meet the budget targets, and would require a drastic change in the investment climate, which Fauzi said was very unlikely.

The state budget draft is expected to be deliberated soon by the current House of Representatives, and is scheduled to be completed before the newly elected lawmakers and government assume office in October.

The government proposed a more than 26 percent increase in subsidy spending next year to Rp 33.6 trillion, a large part of which will go to finance the fuel subsidy. Some see this as an effort by Megawati to win wide-ranging political support, as the lower classes will enjoy inexpensive cooking fuel, while car owners will benefit from cheaper gas.

Iman, however, warned that this policy could turn into a "time bomb", especially if the average oil prices next year are much higher than targeted, thus widening the budget deficit.

If that happens, he said, it would cast a shadow over various development projects such as bridges and roads, while the development of some new schools and hospitals would also have to be halted.

The government is struggling to revise the current budget because the fuel subsidy allocated for this year will have to be increased in response to the higher oil prices.

The International Monetary Fund, as quoted by Bloomberg, described the deficit target as "ambitious", but added that it was consistent with the overall availability of financing, and should keep the public debt-to-GDP ratio on a declining path.

"The prudent budget ... would preserve priority spending on social and development needs," it said in a statement.

Spending in 2005 would be capped at Rp 361 trillion from Rp 368.8 trillion in 2004, while revenue was seen as increasing slightly to Rp 377.9 trillion from Rp 343.9 trillion this year.

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