State budget won't bolster growth: Expert

State budget won't bolster growth: Expert

JAKARTA (JP): The contraction of funds reflected in the state budget plan for 1995-1996 will not affect Indonesia's economic growth because the government no longer plays the major role in development, a leading economist says.

"We have no reason to worry about the contraction in public spending because the government is no longer the major agent of growth," Hadi Soesastro, an economist from the Center for Strategic and International Studies, said in an interview with The Jakarta Post here yesterday.

In the 1995-1996 draft budget submitted yesterday by President Soeharto to the House of Representatives, the government plans to allocate Rp 30.78 trillion for development programs. It aims to extract Rp 52.98 trillion from the private sector through taxation and other levies.

"This apparent contraction will not affect economic growth because the private sector has been playing a bigger role since the government moved to encourage non-oil exports in the early 1980s," Hadi said.

The 1995-1996 draft budget, which will be implemented on April 1, after gaining approval from the House, balances revenues and spending at Rp 78.02 trillion (US$35.45 billion), up 11.9 percent from the current budget.

President Soeharto said in his 1995-1996 budget proposal that last year the economy beat the 1993 growth rate of 6.5 percent.

The economy is expected to grow even more rapidly in 1995.

Indonesia is one of the few oil producing countries which have been successful in maintaining steady economic growth since the oil boom ended in the 1980s.

The government has said that Indonesia needs a total investment of about Rp 660 trillion in the coming five years, 75 percent of which is expected to come from private investment.

Hadi said that the 1995-1996 budget plan generally reaffirms the government's sound fiscal and monetary policies.

Revenue

On the revenue side, Hadi did not find anything unexpected except the modest projection for income tax receipts. The proposed budget targets a 2.1 percent increase in income tax revenue in fiscal year 1995-1996, amounting to Rp 19.24 trillion. This is compared to the 26.9 percent increase budgeted in this fiscal year.

"This is unprecedented, and I do not know why the government did it. Are they skeptical about their ability to collect income taxes?," he asked.

In the 1995-1996 budget, income tax will constitute about 36 percent of the government's total domestic non-oil revenues of Rp 52.98 trillion.

In turn, total domestic non-oil revenues -- which means total government levies -- make up 79.9 percent of the projected total domestic revenue of Rp 66.26 trillion.

The economist added that the modest projection for income tax receipts could be due to the newly amended tax laws, which became effective this month.

"Maybe they need some time to adjust," he said, adding that Indonesia's self-assessment system in income-tax collection is difficult to administer.

Hadi acknowledged that the government plans to compensate for the modest receipts from income tax with a boost in its receipts from value-added tax by about 25.8 percent in 1995-1996, to Rp 16.65 trillion.

The economist also voiced his concern over the fact that the ratio of Indonesia's tax collection against the gross domestic product is still low, at around 11 percent.

"The government should raise this ratio to 16 percent in the coming five years so that we can be more independent in financing of our development," he said.

Hadi also remarked that despite frequent political rhetoric, the role of foreign aid will actually increase in 1995-1996 due to its 17.4 percent increase to Rp 11.75 trillion.

Foreign aid will account for 38.2 percent of the government's development spending of Rp 30.78 trillion in 1995-1996. By comparison, this fiscal year's foreign aid of Rp 10.01 trillion will account for only 36.5 percent of the development spending, estimated at Rp 27.39 trillion.

The economist felt confident about the government's estimate of an average oil price of $16.50 per barrel in projecting that oil revenue will reach Rp 13.27 trillion or about 36 percent of all domestic revenues.

"If this is not achieved, we can still count on the non-tax receipts which are estimated to rise by 51.2 percent to Rp 6.49 trillion in 1995-1996," he said.

Non-tax receipts comprise about 9.79 percent of all domestic revenues in the proposed budget. This sector will mostly be dominated by public offering of the shares of state firms, officials said.

Expenditure

Hadi also welcomed, albeit with some reservations, the 11.5 percent increase in routine expenditure which is mostly generated by the 10 percent wage increase for civil servants and military personnel in 1995-1996.

"I do not think that the wage increase will have a serious inflationary effect, and it is about time for those people to get a raise since they have been very poorly paid," he said.

The economist noted that routine expenditures for personnel have become a constant burden for state budgets ever since the oil boom ended in the 1980s.

"Maybe it's about time we redefined the role and size of our bureaucracy," he said.

Personnel spending will make up about 32 percent of all routine expenditures, at a proposed Rp 47.24 trillion in 1995- 1996.

Hadi regarded the new level of development spending, proposed to reach Rp 30.78 trillion, to be a "wise decision" because most of it will be allocated for infrastructure development and poverty alleviation.

Hadi also stated that although the current account deficit in the 1995-1996 fiscal year is estimated to rise to $4.09 billion from $3.58 billion, "everything will be manageable".

The government estimates that the projected deficit in 1995- 1996 will be "neutralized" by the inflow of private foreign capital reaching $5.07 billion.(hdj)