Score card for the 1997/1998 budget

Score card for the 1997/1998 budget

By Mari Pangestu

President Soeharto on Monday proposed increasing the state
budget 11.6 percent for the 1997/1998 fiscal year at the House of
Representatives. Economist Mari Pangestu from the Centre for
Strategic and International Studies analyzes the proposed budget.

JAKARTA (JP): The 1997/1998 budget represents business as
usual given its similarity with the last few budgets. First is
the relatively low real increase. While the real increase in the
budget is slightly higher than previous years at 5 - 6 percent
given lower inflation, it is nevertheless still a relatively low
growth. In any case, since the government's consumption and
investment only accounts for around 20 percent of gross domestic
product, the net direct effect on growth of the economy from the
budget is relatively small.

Second, fiscal policy is being targeted to ensure the
macroeconomic stability. The 1997/1998 budget has a similar
contractionary domestic impact as previous budgets (i.e.
estimated as injection of rupiah is measured by routine
expenditure net of foreign, minus rupiah taken out of the
domestic economy through taxes or non-oil revenues). In terms of
the domestic impact on the economy, the 1997/1998 budget is
slightly less contractionary at Rp 5.4 trillion (US$2.28 billion)
compared with Rp 6.6 trillion in the current 1996/1997 budget and
Rp 5.9 trillion in the 1995/1996 budget.

Third, this budget also prioritizes infrastructure building,
social welfare and decentralization.

Other than business as usual, what are the other interesting
features and implications of this budget in the broader picture?
An interesting trend to note in the budget is that the strategy
to prepay high interest debts with the proceeds from the sales of
shares of state owned enterprises and surplus in the budget, is
showing up as lower payments in debt servicing. This approach
should be continued and in fact, by budgeting a decline in debt
service payments in future, the government can also "lock in" the
allocation of expected extra funds to the repayment of debt.

The main advantage of this strategy is of course that there
will be more funds available in the future for development
spending which will enable financing of much needed
infrastructure a well as social welfare programs.

Furthermore, given the contribution of debt servicing to the
deficit in the services account, prepaying government debt will
reduce debt servicing due to government debts and thus, make a
way for an increase in private debt. The latter is likely to
increase if one expects greater private sector investments and
privatization to increase in the near future.

In this light it is of interest how the government will spend
the extra revenues from oil taxes due to the higher realized oil
prices -- estimated to be close to $20 per barrel -- compared
with the budgeted oil price of $16.50. It is hoped that, as has
often been stated, that the extra revenues will be used to pursue
the strategy of prepaying debt or to cover any shortfalls of
revenues elsewhere, and not be spent on other non- budgeted
items.

On a broader front what sort of signal can one read from this
budget about macro economic policy. On paper this is good news
because it represents a vote for macro economic stability and
appears to be predicated on a soft landing for 1997/1998.

However, what is difficult to interpret is whether off budget
expenditures and revenues have increased and what their magnitude
is relative to the budget, what their multiplier effects and
whether there has been an increase, given that, as stated in the
budget itself, 1997/1998 are "political years".

Headway

It is also difficult to see much headway in this budget in
achieving a larger budget surplus. As was discussed widely when
the 1996/1997 budget was announced, a larger budget surplus is
needed to raise domestic savings. Achieving this through raising
tax rates has been outruled due to competition for investments
with other countries in the region. However, there is till scope
and potential for widening the tax base through increasing the
types of taxable activities and the tax target, improving and
intensifying the collection of taxes - such as land taxes, and
minimizing leakage.

Furthermore, as was also debated last year, the issue of
raising controlled prices to efficiency levels, such as fuel, and
developing appropriate user charges for public utilities and
services, will do much to reduce government expenditures.
Unfortunately, many of these actions will be difficult to
undertake in the next two years.

Other than the budget itself, the other important aspect is
the projections on the balance of payments and the increase in
the current account deficit from $8.8 billion in 1996/1997 to
$9.8 billion in 1997/1998. While this is a more realistic
estimate on the part of the government, it underscores again the
problem that will be faced this year and the next. Even though
the deficit is still considered manageable given that it is still
around 4 percent or half the rate of economic growth and that
foreign exchange reserves are still high and increasing to around
$20 billion, an important component is ensuring that we do not go
from an orange light to a red light situation with regard to the
deficit and that there continues to be around $10-11 billion
capital inflow. The key is once again ensuring that investors
confidence is maintained and that there is a greater
transparency, conducive investment climate and clearer signals
with regard to various aspects that affect the investment climate
such as policy direction, improvements in the credibility of
government decision making, and political outcomes. For various
reasons, this the piece of the puzzle that defies quantifiable
analysis and prediction - yet appears to be foremost on
everyone's minds.

The writer is a senior economist of the Centre for Strategic and
International Studies (CSIS) in Jakarta.