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.