Misleading budget needs correction

Misleading budget needs correction

By Steven Susanto

JAKARTA (JP): A long-standing conceptual error had been
officially preserved in the construction of the Indonesian State
Budget (APBN)) until the IMF team revealed the difference between
its definition of a balanced budget and that of the government of
Indonesia.

It remains a mystery why prominent economists, inside and
outside the country, never attempted to revise the error. It is
high time the government reworked its conception of a balanced
budget and, accordingly, public savings and investments.

Crudely speaking, it is safe to say that most economists in
Indonesia are sufficiently aware of the distinction between the
Indonesian balanced budget and the standard balanced budget. They
also know that our version is an exception rather than the rule.

However, it is not safe to say these economists are acutely
aware that the Indonesian concept is a misleading exception.

By undeniable definition, a balanced budget means the amount
that a government adds to the stream of spending through its
purchase of goods and services must match precisely the amount
that it withdraws from the stream of income generated by spending
on goods and services.

The government arbitrarily defines a balanced budget as the
equality of revenues and expenditures. Included in the revenue is
foreign assistance.

This anomalous version of a balanced budget severely violates
economists' understanding of what a balanced budget is supposed
to mean.

The Indonesian "definition" only creates confusion in
professional discussions because the term is often used
differently by different policymakers and, unfortunately, even by
the same policymakers to mean different things at different times
and in different places.

Policymakers mistakenly believe that the use of
exemplification can provide a definition of a concept.
Professional communication and progress can only occur when
definitions are cast not in terms of specific illustrations but
are formulated in terms of universal understanding.

This clumsy version of the balanced budget only leads to an
entirely false understanding of the role of aggregate demand,
particularly the budget deficit policy the government has been
exercising for a couple of decades.

The existence of foreign assistance on the revenue side of the
State Budget since the First Five-Year Development Program
indicates that the government has been adopting an expansionary
fiscal policy through its deficit budget.

This is to say that the government has been withdrawing from
the income side less than it places there through its purchase of
goods and services. This reality is disguised under the
misleading definition of a balanced budget which balances the
unbalanced flow of withdrawals and injections.

It is odd that the economy is based on an incompatible concept
and even odder that we, especially the economists, have accepted
the ambiguous term but not the true meaning of it.

Ironically, the misleading concept has been widely accepted as
if it were the same as the universally accepted one. Not only do
we preserve the logical error, but we also sanely but
surreptitiously validate the institutionalized mistake nationally
and internationally.

It is advisable that the reform packages recently announced
also entail a program to redesign the format and content of the
State Budget, including public saving and investment, as well as
the gross domestic capital formation in the national income
accounts.

A balanced budget must be redefined as the equality of
withdrawals and injections to reflect the true financial
strengths of the government.

It is also recommended that government saving be described as
excess of revenues over expenditures. The existing definition of
public saving, as excess of domestic revenues over routine
expenditures, offers no intellectual guide to understanding,
explanation, or prediction.

Public saving, if defined as above, is emphatically negative
and accordingly does not record the availability of public
resources for capital formation as ordinarily concluded.

It is more useful for policymakers if the budget is divided
into consumption spending and capital spending or public
investment. The current classification of routine and development
expenditures is ineffective since policymakers have to reclassify
them again to know for instance the state contribution to capital
formation.

By clearly defining public saving and public investment, the
value of gross domestic capital formation or the sum of public
and private investment in the national income accounts, can
easily be separated to account for its contribution to the
performance of the economy. It is misleading to integrate the
private and public investments because of their different
behavior.

In every system of accounts, the elements ought to be
homogeneous; that is, each unit within an account should behave
similarly, or have similar functions. Private investment and
public investment can be expected to respond differently to the
same economic stimuli.

During the current state of depression marked by deficiency of
domestic demand, the private sector has retracted investment
because it is unprofitable.

In contrast, the government must promote labor-intensive
projects to avoid massive unemployment. In other words, the
government is expected to activate the idle capacity of equipment
and manpower by employing an expansionary fiscal policy to offset
the increasingly contracted activity.

Because of these definitions of public saving and investment,
the dynamics of deficit budget in activating the economy through
its multiplier effect fall from sight, the role of foreign aid in
forging capital goods is misinterpreted and misunderstood, and
the difference in behavior between private and public investment
is overlooked. To facilitate reliable analyses of the current
dismal state of affairs, it is indispensable to reconstruct the
leaky structure of the State Budget and its components.

Not only is the proper definition of importance, but the
official confirmation of the way Indonesia has defined its
balanced budget as "an equally valid truth" -- vis-a-vis the
other truth from the IMF and perhaps the rest of the world --
reflects a totally false perception of the workings of the
economic system.

This is because so far no attention has been willingly paid to
the extent to which the State Budget must express the reasonable
conditions and realistic assumptions as indicated by the
anomalous yet misleading definition of the balanced budget.
Nevertheless, it is by no means unreformable or insurmountable.

The writer is a financial consultant of PT ISI & Rekan,
Jakarta.