Next budget may look familiar

Next budget may look familiar

By Rikza Abdullah

JAKARTA (JP): The composition of the government's budget for
the 1998/1999 financial year will be drastically changed because
of the economic crisis, yet it may have some familiar rings.

With domestic income from the non-oil sector, the biggest
revenue component, likely to fall sharply because of lower income
tax receipts, the government's budget will once again be
underwritten by bigger oil receipts, and foreign aid.

The budget could look like it did in the 1980s.

The downside of this is that the government's spending
programs will once again become vulnerable to the vagaries of the
international oil and foreign exchange markets.

The 1997/1998 budget, unveiled in January last year, sets the
government's spending and income to balance at Rp 101 trillion
(US$42.8 billion at the then conversion rate, or $18.5 billion at
the current rate).

Foreign aid was projected to account for nearly a third of the
government's development spending (public investment).

Non-oil domestic sector was projected to contribute Rp 73.18
trillion, or 83.1 percent of the total domestic revenues targeted
at Rp 88.06 trillion. Income taxes from the oil and gas sector
were projected to be Rp 14.87 trillion, or 16.9 percent of total
domestic revenue.

Some of these targets now look doubtful.

Director General of Taxes Fuad Bawazier said recently revenue
from non-oil taxes was likely to fall short of target because
many companies were suffering huge foreign exchange losses due to
the sharp depreciation of the rupiah against the U.S. dollar.

Economist Sri Mulyani of the University of Indonesia estimates
that the government's revenue from non-oil taxes might fall sort
by slightly more than Rp 10 trillion in 1997/1998.

The shortfall will automatically lower the role of tax
payments in the country's gross domestic product (GDP). Tax
payments contributed only Rp 55.95 trillion or 11.8 percent to
the GDP of Rp 474.63 trillion in 1996/1997.

The government has, over the years, worked hard to reduce its
heavy dependence on the oil and gas sector, which in the 1970s
accounted for two-thirds of its total revenue.

At the beginning of the Fifth Five-Year Development Plan
(Repelita V), this sector accounted for 42.5 percent of the
government's domestic revenue but by the start of Repelita VI, in
1994/1995, it was down to 20.4 percent.

The government has also steadily increased its savings -- the
difference between domestic revenue and its routine spending --
and reducing its dependence on foreign aid.

In the mid 1980s, foreign aid accounted for two-thirds of the
government's development spending. Then it fell to 53.7 percent
in 1989/1990 and to 30.6 percent in 1994/1995, before rising back
to 36 percent in 1996/1997.

Economist Mari Pangestu of the Centre for Strategic and
International Studies says the government's savings will
substantially fall short of its target of Rp 25.9 trillion in
1997/1998 because non-oil tax revenues will be far lower than
projected.

Oil and gas revenues will increase this year because of higher
prices and depreciation of the rupiah against the dollar, but
they will not likely offset the hefty increase the government has
to fork out in servicing its foreign debts, Mari says.

In any case, the government will have to allocate more funds
than it planned toward domestic fuel subsidies, she said.

The government has budgeted Rp 62.15 trillion in 1997/1998 for
routine spending, including Rp 32 trillion for public sector
workers' salaries and wages and Rp 19.57 trillion for foreign
debt servicing.

The government canceled in September dozens of development
projects worth a total of Rp 49.5 trillion in response to the
monetary crisis. Of these, 9 percent are directly related to the
current budget plan.

In spite of the spending cutbacks, the government has
maintained investment in sectors directly related to its efforts
to alleviate poverty and develop human resources.

Given that the government remains the largest spender in the
economy, its budget is bound to affect the economic growth rate,
but by how much is something economists are still debating.

Statistics, however, show a telling relationship:

When the government raised salaries and wages 10 percent and
allocated 41 percent of its spending to development projects in
1994/1995, the economy grew 7.5 percent in 1994.

In 1995/1996, the government again raised salaries and wages
10 percent and allocated 36.2 percent of its expenditure to
development projects, the GDP expanded 8.2 percent.

The economy grew 7.9 percent in 1996, when the government
increased salaries and wages 10 percent and allocated 38 percent
of its spending to investment projects in 1996/1997.

If the correlation is strong, then a contractive budget, or at
least an austere one as many are predicting for 1997/98, will
also lead to smaller, or possibly even a negative growth rate.

Table: State Budget During Repelita VI Period

1994/1995 1995/1996 1996/1997 1997/1998

Revenues 76,255.8 82,727.8 90,616.4 101,086.7

* Domestic Revenues 66,418.0 71,557.8 78,202.8 88,060.7

Oil & Gas 13,537.4 14,848.7 14,120.1 14,871.1

Non Oil & Non Gas 52,880.6 56,709.1 64,082.7 73,189.6

* Foreign aid 9,837.8 11,170.0 12,413.6 14,871.1

Expenditure 74,760.7 82,352.5 90,616.4 101,086.7

* Routine 44,069.0 52,540.9 56,113.7 62,158.8

* Development 30,691.7 29,811.6 34,502.7 38,927.9

Government Savings 22,349.0 19,016.9 22,089.1 25,901.9

Note: All are realized figures except for 1997/98 which are targets.

Source: The Ministry of Finance.