House ends debate on 2004 budget, cutting deficit target to 1.15% of GDP

The Jakarta Post, Jakarta

The House of Representatives and the government wrapped up on Thursday the deliberation of the 2004 state budget draft, which saw a cut in the deficit target to 1.15 percent of gross domestic product (GDP) from 1.2 percent earlier proposed by the government.

After weeks of deliberation, lawmakers at the House commission on budgetary affairs slashed the deficit target to Rp 23.02 trillion (US$2.72 billion) from the government's proposal of Rp 24.9 trillion submitted in August.

Legislator Abdullah Zainie, who presided over the hearing that lasted until late on Thursday, said that the draft would now wait for final approval from the House's plenary meeting, slated for Nov. 11, before becoming a law.

The lower deficit resulted from a higher-than-expected revenue, boosted by incomes from tax. Tax revenue was raised from Rp 271 trillion to Rp 272.2 trillion, which helped increase total revenue to Rp 349.9 trillion from Rp 343.9 trillion set under the initial proposal.

The deficit target is in line with the government's commitment for a gradual deficit decline before finally balancing it by 2006.

This year, the state budget has targeted the deficit at 1.9 percent of GDP, or Rp 34.4 trillion.

Revisions were also made in most of the figures in the draft, including macroeconomic assumptions.

According to Zainie, the revision was inevitable after taking into account that next year could be a challenging one for Indonesia, as not only will it hold its first ever direct general elections, but it will also mark the first budget year without the presence of the International Monetary Fund's (IMF) financial assistance.

Having decided not to extend the current IMF's special program later this year, means that the country would no longer be eligible for the Paris Club of donors debt rescheduling.

This puts additional burdens on the already cash-strapped state budget and limits its ability to allocate more on development spending to help prop up economic growth, crucial to reducing chronic problems of poverty and unemployment.

Despite the challenges however, lawmakers and the government remained optimistic over the economic prospects next year, and even revised upward the economic growth assumption from the initial 4.5 percent to 4.8 percent.

The optimism was based on the assumption that the global economy would continue to improve, coupled with continued strong consumption at home.

On the domestic front, a strong consumer spending is very likely in 2004, spurred by a large amount of expected spending by political parties during their campaigns.

Elsewhere, it was also revealed during the hearing that to help cover the deficit, the budget has also earmarked Rp 5 trillion in proceeds from the privatization program, Rp 5 trillion from bank sales, aside from the government's new bond issues worth Rp 11.4 trillion -- both domestic and global bonds.

Budget Basic Assumptions

Revised Initial

Currency rate (Rp) 8,600 8,700

Inflation (%) 6.5% 7.0%

Growth (%) 4.8% 4.5%

SBI 3-month (%) 8.5% 9.0%

Oil price ($/barrel) 22 21

Oil output (bpd) 1.15m 1.15m

Source: House budget commission

SBI = Bank Indonesia promissory notes

bpd = barrels per day