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.