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.