Prudent budget

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.