The transition budget

The transition budget

The market will be comfortable with the draft 2005 state
budget that President Megawati Soekarnoputri proposed to the
House of Representatives on Monday because the spending plan will
continue the present fiscal consolidation.

The budget deficit is projected to fall to 0.8 percent of
gross domestic product from 1.2 percent in the current year.

The key assumptions used to estimate expenditures and revenues
also are quite conservative. A GDP growth of 5.4 percent, an
average rupiah exchange rate of Rp 8,600 to the dollar, interest
rates at 6.5 percent, inflation at 5.5 percent and average
international oil prices at US$24 a barrel would preclude any
painful spending adjustments midway in the coming fiscal year.

Like the previous budgets of the past seven years, the
spending plan is austere and is even likely to have a contractive
effect on the economy. Total expenditure is budgeted to increase
by 5.5 percent but, adjusted for inflation, which in the current
year is estimated at 7 percent, the expenditure will in real
terms decline by 1.5 percent.

Moreover, quite a portion of the planned expenditure, notably
foreign debt servicing (Rp 76.1 trillion) and on subsidies (Rp
33.6 trillion) will not add anything to the purchasing power in
the domestic market, while Rp 297.5 trillion in taxes will be
taken out of taxpayers' pockets.

The tax effort is, however, quite healthy as it will
strengthen the capability of domestic funding of the public
sector. Meanwhile, receipts from foreign borrowing have turned
negative with new loan disbursements far smaller than interest
payments and the amortization of old foreign debts.

The official capital account will see a net resource outflow
of Rp 20.2 trillion next year, up from Rp 16.13 trillion this
year, because the government is no longer entitled to the debt
rescheduling facility from the Paris Club of sovereign creditors.

The government expects an increase of 9.5 percent in domestic
tax revenues, which seems reasonable in view of the projected
economic growth of 5.5 percent and the general tax reforms that
start to come into effect this year.

The basic features of the new budget still reflect the fiscal-
policy hallmarks of the Megawati government, but this factor is
quite positive in terms of policy continuity and sound fiscal
management. After all, whomever wins the Sept. 20 runoff,
Megawati or Susilo Bambang Yudhoyono, the new government will not
have much room in the way of fiscal pump-priming due to the
severe constraints resulting from the mountains of foreign and
domestic debts that were incurred by the 1997 economic crisis.

As there seem not to be many alternative fiscal policies that
would sustain market confidence, it is better to continue current
policies that are designed to steadily reduce the budget deficit
and the stock of government debts, to reform the national tax
system and increase the efficiency of government expenditure. No
wonder the economic platforms of both presidential candidates are
by and large quite similar.

This does not mean, however, the current government by
preparing the budget will try to usurp the political mandate of
the new government. The budget is the most important tool the
government can use to implement its fiscal policies, and fiscal
and monetary policies are in turn the most important instrument
the government has deployed to influence the economy.

Preparing the budget plan now only helps the new government,
to be installed in October, which would not be able, in any
occurrence, to prepare its own budget before the November
deadline. The budget will ensure the transition to the new
government runs smoothly.

The performance and credibility of the new government will
primarily be judged by the 2005 budget as this spending plan will
determine the allocation and distribution of resources; from area
to area and from rich to poor. Judging by the main outlines of
revenue and expenditure plans, the budget proposal is fairly
realistic.

However, what the new government can still do is fine-tune or
realign spending priorities -- the direction of agricultural and
manufacturing development and other measures with which it can
implement its economic vision.

The estimates and assumptions made for the budget proposal,
however, are based on one key factor: the presumption the
upcoming presidential election will run smoothly and fairly. Let
all of us work to ensure this poll is fair and peaceful.