Increasing fiscal discipline
The House of Representatives approved on Monday the draft state budget for 2004 with slight changes in the key economic assumptions but the central theme of the spending plan remains the same -- high fiscal discipline.
The House and the government shared a more optimistic outlook for the economy, expecting bigger external demand for Indonesian goods due to the stronger growth of the global economy. The Indonesian economy is estimated to expand by 4.8 percent next year, up 0.3 percent from the earlier assumption used in the budget plan when it was proposed in mid-August.
They also were equally upbeat about the monetary condition, predicting an average short-term interest rate of 8.5 percent (as against the earlier assumption of 9 percent), inflation at 6.5 percent (7 percent), international oil price at $22/barrel ($21) and the average exchange rate of the rupiah against the dollar at Rp 8,600 (Rp 8,700).
The changes in the key economic assumptions are, however, too small to effect significant changes in the aggregate figures on spending and revenues. The bottom line is nevertheless quite encouraging because the new assumptions will enable the government to lower its budget deficit to as low as 1.2 percent of the gross domestic product, as against 1.9 percent estimated for the current year.
The smaller deficit will be made possible by the combination of larger tax receipts due to the higher economic growth and smaller service burdens for domestic debts as a result of the decline in the central bank's short-term interest rate.
However, the smaller deficit is still quite challenging, especially next year when the government will no longer be entitled to a debt-rescheduling facility from the Paris Club of sovereign creditors. This factor alone will increase the service burdens of the government's external debts by $3 billion. On top on this, about Rp 20 trillion in government bonds will mature next year.
The decline in the budget deficit is nevertheless quite impressive as it reflects a high sense of budget discipline even in an election year when most governments usually launch populist programs, the distribution of political goodies to attract voters.
But again, as analysts and the House have repeatedly warned, all these budget figures, however conservative they may be, are simply estimates that have to be realized through action programs.
Fiscal discipline should be maintained to achieve the key assumptions for inflation and interest rates which, in turn heavily influence the rupiah rate and budget deficit. Budget discipline is especially crucial next year in anticipation of a steep increase in private consumption as political parties escalate campaigns throughout the country.
Excessive spending outside the budget guidelines not only will increase inflationary pressures but may also force the central bank to expand its open-market operations and raise its benchmark short-term interest rate to soak up excess liquidity.
This monetary tightening will in turn hurt businesses as they have to pay larger interest costs on their loans. Further down the line, business risks may also rise, prompting banks to refrain from lending, preferring instead to put their excess liquidity in the central bank's instruments.
Budget discipline means not only spending fully according to the fixed appropriations but also seeing to it that all fees from public services are transferred to the state coffers and that the tax base continue to expand to increase revenues without harassing businesses.
But the fiscal discipline should still be supported by concerted efforts to improve trade-facilitation services such as customs, port handling and transportation, the regulatory environment and licensing system, otherwise Indonesia will not be able benefit from the stronger economic growth expected in the U.S. and Europe.
Hence, all in all, the 2004 state budget is quite conservative. But it is the high spirit of fiscal discipline that will make the market comfortable in the 2004 election year.
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