State budget's power to boost economy limited

The government has unveiled the 1998/1999 draft state budget amounting to Rp 133.49 trillion (US$33.3 billion based on a rate of Rp 4,000 to the dollar) or an increase of 32.1 percent from the current budget. Economist Sri Mulyani Indrawati, a researcher at the University of Indonesia's Institute for Economic and Social Research discusses the impact of the budget plan on the country's economy.

Question: How do you see the state budget plan for 1998/1999, which strives for a 32.1 percent increase in both revenue and spending?

Mulyani: Generally speaking , the budget plan is too optimistic. The impact of the budget plan on the economy will not be significant because the increase in revenue is influenced more by expected incomes from the oil and gas sector and from foreign aid, while the spending increase is merely based on price increases. The spending of rupiah derived from the two sectors can theoretically expand monetary supplies but high inflation and increases in cost structures, which are caused by the volatility of the rupiah's exchange rate, will limit the budget's capability to boost the economy.

Q: The government is expecting a 9.5 percent decrease in revenue from income tax to Rp 26.33 trillion but a 13.1 percent increase in value-added tax revenue to Rp 27.83 trillion. Are these targets realistic?

M: About 60 percent to 70 percent of the government's income tax revenue usually comes from big companies which are now mostly affected by the rupiah's sharp depreciation against the U.S. dollar. Their foreign exchange losses will severely affect the government's income tax collection in 1997/1998 and 1998/1999. Because the rupiah is likely to remain highly volatile this year, its revenue from income tax may fall up to 20 percent. The expectation of a 13.1 percent increase in value-added tax collection is also unrealistic because a 4 percent GDP growth will not boost domestic sales of goods that much.

Q: The government projects a 57.2 percent increase in foreign debt services to Rp 30.2 trillion based on Rp 4,000 to the dollar during 1998/1999. What do you think?

M: It is difficult to expect the dollar's value, which exceeded Rp 7,000 on Tuesday (and more than Rp 8,000 yesterday), to average at Rp 4,000 in 1998/1999. And yet, the allocation of Rp 30.2 trillion for debt servicing has been too high and too burdensome to our economy. The government, therefore, needs to negotiate with its creditors on the possible rescheduling or recalculation of its debt repayments.

In the future, if there is no financial reengineering, the government's budget will be very much dominated by debt servicing. As a result, the budget can no longer be used as an effective fiscal instrument to control and manage the macroeconomy.

Q: The government has promised to generate a budget surplus worth 1 percent of GDP (projected at Rp 671 trillion in 1998/1999) but such a surplus is not included in its budget plan. Which part of its expenditures will the government cut to generate that surplus?

M: The first alternative will be cutting investment by suspending some projects, while the second alternative will be reducing the Rp 10 trillion subsidy for domestic sales of fuel. But reducing the subsidy is very sensitive to political developments.

Q: Is the government realistic in expecting the economy to expand 4 percent in 1998?

M: Achieving a 4 percent GDP growth is doubtful because lower than expected revenues from income tax and value-added tax will limit spending for development projects. Development spending may also be cut if the government wants to generate a budget surplus. Furthermore, high inflation and high interest rates will also limit the multiplier effect of the budget. A growth of 1 percent to 2 percent will be more realistic.

Q: Can the inflation rate in 1998 be curbed at 9 percent as expected by the government because the dollar's rate against the rupiah value has now far exceeded Rp 4,000 and domestic fuel prices may have to be raised later this year?

M: Even without any increase in fuel prices until December, curbing this year's inflation rate at that low level is impossible. Increases in the prices of imported products are likely to raise the inflation rate to between 13 percent and 15 percent this year. The University of Indonesia's Institute for Economic and Social Research projects the inflation rate above 15 percent if the rupiah's rate against the dollar averages at Rp 8,000 during the year.

Q: Will the government's decision to freeze the salaries of its personnel affect public services?

M: Yes, seriously. The real value of civil servants' salaries, on the one hand, will decrease due to high inflation and the sharp depreciation of the rupiah. But on the other hand, civil servants, at this difficult time, are required to implement economic reform, create clean governance and reduce intervention into business activities. I am even afraid that the reform package recommended by the International Monetary Fund might not be carried out thoroughly because of inadequate bureaucratic support.

Q: How do you see the allocation of development expenditures?

M: The composition is good because the government is placing priority on projects aimed at a more equitable distribution of income and improvement of infrastructure for the distribution of goods. (riz)