Prudent budget
The structures of revenue and spending plans for the 1997/1998 fiscal year beginning in April are very similar to the current state budget, which is based on a conservative fiscal policy. The 11.6 percent nominal increase, or 5 percent in real terms (adjusted for the 6.7 percent inflation last year), in the proposed budget will not have a significantly expansive impact on the economy.
Foreign political analysts may see the budget as unusually tight and austere in view of this year's general election, which in many other countries would call for an expansive spending program to finance political goodies for the electorate.
An austere, realistic budget, however, is precisely what the economy needs for sustainable, healthy growth. Conservative fiscal management precludes any drastic, shock-therapy measures in case assumptions of revenue targets err. The budget also demonstrates the government's determination to maintain prudent macroeconomic management, one of the foundations of long-term sustainable growth.
The draft budget maintains the target of monetary aggregates at the same level as the current fiscal year -- an 18 percent expansion in economic liquidity and a 17 percent increase in total bank lending. The estimated average price of oil, which together with natural gas accounts for around 14 percent of total internal revenues, is also maintained at US$16.50, the same price used for the current budget revenue projection.
The prudent, realistic budget will keep investors assured of stability and consistency in macroeconomic policies; these preconditions will in turn maintain a high rate of capital flow, badly needed to cover the large deficit in the balance of payments current account. In fact, the government's estimate of $9.8 billion in the current account deficit, or 4 percent of Gross Domestic Product in the coming fiscal year, rests on the assumption that official and private capital flow will increase to $16.18 billion.
The biggest increase in revenue is expected from non-oil tax receipts, notably income tax, envisaged to rise 22.8 percent.
This is the precise reason the budget will not have a substantially expansive impact on domestic market demands. Around Rp 64.7 trillion ($27.4 billion), or 64 percent of total spending, will be derived from taxpayers through taxes and excise duty. Moreover, another Rp 19.23 trillion, or 19 percent of total spending, will be allocated to foreign debt servicing and repayments.
Another outstandingly sound trend in the budget plan is the 17.30 percent increase envisaged in government savings (the balance between internal revenues and routine spendings). Increased savings will not only reduce dependence on foreign loans for public sector investments, but will also give a broader leeway for the government to better target equity development spendings.
The largest increase in routine spendings -- at almost 16 percent -- will go to personnel expenditures, due to an estimated 10 percent rise in civil service and military salaries and pensions. The government planned an annual increase in the civil service pays last year but the size of this rise will be announced only after the budget plan is approved by the House of Representatives.
The government's top priorities remain regional development, with an emphasis on education, health and poverty alleviation to lift an estimated 22 million people, or 11 percent of the population, from absolute poverty.
Overall, the 1997/1998 draft budget shows another step towards a healthy fiscal balance. At the same time it will send the right signals to the market, and keep the people -- notably the business community -- assured of consistently sound macroeconomic management, despite 1997's heavily political agenda.