New 2003 budget approved

New 2003 budget approved

The state budget proposal for 2003 that was approved by the
House of Representatives on Wednesday was significantly different
from the original plan submitted in August because of major
changes in several key economic assumptions brought about by the
Oct. 12 bomb attack in Bali.

The target of economic growth in terms of real gross domestic
product was revised downward from 5 percent to 4 percent and the
average rupiah rate from Rp 8,700 to a range of between Rp 8,500
and 9,500 relative to the U.S. dollar. The inflation rate was
revised upward from 8 percent to a range of 9 percent to 9.5
percent and the average international oil price from US$20.5 to
$22/barrel. However, the target of benchmark short-term interest
rates was maintained at 13 percent.

The budget deficit was revised upward from 1.3 percent of
gross domestic product to 1.78 percent to allow for the
allocation of an additional Rp 10.6 trillion ($1.17 billion) for
pump priming to partly offset an anticipated downturn in private
sector spending. This will increase government investment
expenditure next year to Rp 65.1 trillion.

Most analysts have predicted that without an additional
stimulus the economy would only be able to expand by a mere 3.5
percent at the most next year, or about similar to the estimated
growth for this year.

Simply juggling budget aggregate figures is one thing but
translating them into a set of appropriate action programs that
are credible to the market is quite something else and enormously
challenging for that matter. If the market does not accept the
revised budget figures as credible, the new key economic
assumptions would soon be rendered unrealistic.

True, the government should come up with additional pump
priming measures to offset an anticipated slackening of the pace
of private investment and consumer spending, because the
increased security risks and anticipated negative ramifications
of the bomb attack on domestic political conditions are
heightening business risks, adversely affecting business
confidence and banking operations and decreasing tax revenues.

Since the government reduced the target of its tax revenues by
Rp 6.6 trillion from the original target due to an expected
decline in taxable corporate incomes, the biggest question now is
where the additional pump priming cash will come from,
considering that printing more money is wholly out of the
question.

New calculations of non-tax receipts, notably royalties from
natural resources, dividends from state companies and fees from
public services led the government and the House to the
conclusion that the target of these revenues could still be
increased by Rp 15 trillion.

Taking into account the Rp 6.6 trillion shortfall in tax
receipts, non-tax revenues will thus contribute a net additional
receipt of around Rp 8.4 trillion.

On top of that, the government expects an additional Rp 2.5
trillion from official loans and grants from its international
donor community (Consultative Group on Indonesia) which will
decide how much to commit in January.

But these figures are simply estimates that have to be
realized through action programs. Tax collection has to be
stepped up, otherwise the shortfall in tax receipts could be much
larger than the estimated Rp 6.6 trillion. The tax directorate
general needs to continue the vigorous campaign it launched last
month to collect at least a portion of the Rp 19.6 trillion in
corporate tax arrears.

Budget discipline has to be heightened to ensure that all fees
from public services are transferred to the state coffers. A
good balancing act is necessary to ensure that dividend payouts
by state companies will not jeopardize their investment programs
to improve efficiency and competitive strength.

No less important is to meet the reform agenda because quite a
portion of loan pledges from CGI creditors are contingent upon
the government's policy performance.

Yet more challenging is to ensure that the pump priming goes
primarily to labor intensive programs (job creation), poverty
alleviation, the empowering of small and medium-scale enterprises
and improvement of export infrastructure.

Trade-facilitation measures in regulations, licensing systems,
transportation, port handling and customs services need to become
efficient and professional to offset the additional costs of
business caused by the increased security and business risks.

Job creation is particularly vital in view of the estimated
40 million fully unemployed and under-employed people.

Certainly, a 4 percent economic expansion is far from adequate
to absorb the unemployed, let alone the 2.5 million new job
seekers that enter the labor market every year. Yet, well-
targeted investment spending of Rp 65.1 trillion could go a long
way in preventing the already dangerously high unemployment level
from exploding into social unrest, as well as to minimize
poverty.