Realistic budget

Realistic budget

The 1995-1996 state budget plan is realistic when viewed both
from the assumptions used to estimate revenues and from the way in
which the limited financial resources are allocated. The government
apparently prefers a conservative spending plan to minimize the risk
of having to adopt bitter, contingency measures whenever the
estimates err.

The US$16.50 average oil price used for estimating oil and gas
tax receipts that account for 17 percent of total revenues is
realistic in that the risk of an overestimate is minimum. It is
obviously more convenient to cope with the impact of under-
estimates.

The 12.2 percent increase envisaged in tax revenues from the
non-oil sectors, which will contribute 57.3 percent of total
revenues, is also pragmatic, especially because the largest portion
of the increase is expected from the value added tax (VAT). Since
the new tax laws lower income tax to a range of 10 percent to 30
percent from 15 percent to 35 percent previously it is indeed
difficult to expect a significant rise in receipts from this direct
tax. It will take some time to significantly broaden the tax base.
But because almost all indicators point to robust economic growth
again this year, the 25.8 percent rise expected in VAT receipts is
not too ambitious a target. Differing from income tax, VAT
collection is based on transactions and not on accrued incomes or
profits.

The most encouraging trend, we think, is the 51.2 percent
increase envisaged in non-tax receipts, consisting mostly of
dividends from state companies and service fees collected by the
various ministries. They are expected to contribute Rp 6.5 trillion
($2.95 billion) or 8.3 percent, up from 6.3 percent, of total
revenues. This development indicates significant results in the
restructuring of state companies and the better management of
service fees collected by the various government offices. Hopefully,
all other fees or levies, such as reforestation funds, will
eventually be included and accounted for in the state budget.

The 17.4 percent rise expected in receipts from foreign loans
is encouraging as well because that increase will not be generated
by larger new borrowings but by smoother implementation of foreign
aid. That development certainly results from much more expedient
budgetary procedures. That is another benefit from speedier
implementation of foreign loans which are mostly tied to specific
projects. The commitment fees (usually amounting to 0.75 percent) on
the undisbursed loans that have to be paid by the government every
year will be reduced.

The government decision to raise the salaries and pensions of
the civil servants and Armed Forces members by 10 percent, in spite
of the tight budget, is very wise. Even though the nominal increase
is rather insignificant, given the 9.24 percent inflation last year,
that measure will at least prevent further worsening of the living
conditions of the government personnel. The official pledge to
develop a clean and credible administration will sound a joke if the
government personnel become poorer amid the steady economic
expansion.

The mere 1.4 percent increase in foreign debt installments and
service payments is another impressive trend. This welcome
development results from the wise government measure to amortize
$800 million of its foreign debts to the World Bank and the Asian
Development Bank ahead of their maturity dates. Although the amount
of the repayment seems rather negligible compared to the $59 billion
the government now owes to foreign creditors, it is still
significant because the two multilateral agencies charge annual
interest rates of six to seven percent, as against less than three
percent charged by government creditors. The more encouraging is the
trend because the $800 million fund was derived from the public
offering of 35 percent of state-owned PT Indosat's shares on the
domestic capital market and the New York Stock Exchange. More such
funds are expected from the public listing of several other state
companies, including PT Telkom, PT Jasa Marga (freeway development)
and PT PLN (electricity) within the near future.

So all in all, we are impressed by the budget proposal because:
We are assured that the budget will not necessitate tougher fiscal
and monetary measures; it shows better administration and management
of government service fees and levies; its structure is much
stronger as it relies increasingly on tax receipts from the non-oil
sectors; and state companies not only become more efficient but turn
increasingly from cost into profit centers.