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.