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.