Habibie's budget
President B.J. Habibie's speech outlining the government's spending plans in the House of Representatives on Tuesday was exceptionally long for a bare-bone budget that essentially offers little to stimulate Indonesia's depressed economy. The speech, which lasted for two hours and 15 minutes, was not only tortuous for House members to sit through, it was disproportionate in length given that only 11 months remain before his administration has promised to make way for a new, democratically elected government.
With little to discuss by way of the budget, Habibie took the opportunity to indulge in an elaboration of his vision and to defend some of his more controversial policies. The speech also provided an insight into where his priorities lie, and more importantly, what can be expected by way in terms of new policies. His warning about the "untoward" behavior of the press, for example, could signal the imminent return of closer government control of the media. By instructing the Armed Forces to take firm measures to restore security and order, while at the same time arguing that mobilization of the masses has been the source of social unrest, Habibie hinted at a tough clampdown on student protests, if and when they resume after Ramadhan.
When the President did eventually get round to explaining the government's spending plans, he gave little reason for cheer. The sole exception was when he announced a plan to raise civil service and Armed Forces salaries and pensions. The government has rarely used fiscal policy to invigorate the economy, and the 1999/2000 budget looks to be no exception, even with the nation desperately searching for the first green shoots of recovery.
In all fairness, the budget includes massive provisions for various social safety net programs. These programs are needed to provide relief to those worst affected by the economic crisis. The government is also forging ahead with its attempt to promote its concept of a people's economy by providing massive subsidies to interest rates on over a dozen loan schemes devised to help small and medium-sized enterprises and cooperatives. Funds allocated to recapitalize commercial banks make up another major part of the budget. Using Rp 18 trillion to bail out mismanaged banks may seem rather excessive, but a healthy banking system is central to economic recovery.
Given the limited funds available to the government, there will be precious few new public investment projects initiated in the coming year, and what modest spending plans the government has hinge on its ability to raise revenues. Here, the government has very few options. With weak global oil prices dragging oil and gas revenues down and the all pervading recession squeezing its ability to increase taxes and levies in other sectors of the economy, the government plans to resort to greater foreign borrowing to cover the expected budget deficit.
In drafting the budget, the government has assumed a zero growth rate in the 1999/2000 financial year, an inflation rate of 17 percent, world oil prices averaging at US$10.5 a barrel, and an exchange rate of Rp 7,500 to the American dollar. These assumptions appear somewhat conservative given that in 1998, Indonesia's economy contracted by 13 percent and inflation rose to nearly 77 percent. The current budget, after numerous revisions, was recalculated assuming $13 per barrel of oil and an exchange rate of Rp 10,000 to one dollar.
Despite the tenuous nature of the assumptions used to draft next year's budget, there is a larger and more telling "if" upon which the accuracy of the government's financial planning hinges. The budget assumes that the markets and the public will have strong confidence in the government, which in turn hinges on political and social stability, neither of which can be guaranteed.
In spite of his lengthy budgetary speech, Habibie failed to address the question of political stability convincingly. His apparent desire to restrict student protests, when the student movement is just about the only effective means of checking government power, is likely to stir the students into further action. Furthermore, establishing a civilian militia in the face of widespread objections will only serve to antagonize the public, giving rise to the prospect of yet more clashes and confrontations and even less stability in our already turbulent country. If either of these misdirected ventures were to take place, even the most conservative budgetary assumptions would come to appear wildly optimistic.