Waiting for new budget

Waiting for new budget

President Soeharto has made it quite clear that the 1995-1996
state budget plan he will propose to the House of Representatives
tomorrow will be as austere as the current one. This policy
contrasts strikingly with the prediction of more robust economic
expansion this year. It also points out the diminishing direct
role of the government in economic activities as the private
sector increasingly becomes the locomotive of growth.

Indeed, as the government has transferred the responsibility
for most economic development to the private sector and has
reassumed its basic function and role as the administrator,
facilitator and the provider of support services, there is no
urgent need for the public sector to make an expansive spending
plan. Nor does the government have much leeway in planning an
ever bigger budget, given the increasingly limited capacity of
its financial resources.

First, the receipt account. The international prices of crude
oil, which, along with natural gas, accounts for one fifth of
total internal revenues, will most likely hover at the average of
US$16/barrel for the next fiscal year beginning in April. True,
the average $16 oil price projected for the current fiscal year
was surpassed slightly during the April-December, 1994 period.
But the oil price decline from $17 in November to $16.3 in
December, which was unusual given the beginning of the winter,
signaled a warning against high projections. Projecting a higher
average oil price for the next budget would risk not only an
eventually painful correction with its consequent havoc in the
monetary sector, but also might sow seeds of speculative
assumptions among the private sector.

Experiences have shown that in so far as tax receipts from the
hydrocarbon sector are concerned it is much safer for the
government to err on the conservative side. After all, coping
with a windfall is much less strenuous than covering a big
shortfall. Hence, we expect the government to maintain the oil
tax receipt estimates on the basis of the $16 average price. That
means that oil tax receipts may still increase in terms of rupiah
due mainly to the rupiah's depreciation against the U.S. dollar.

The only significant increase in revenues is expected to be
generated by tax receipts from the non-oil sectors, which
contribute more than 61 percent of total government internal
revenues. Judging from the record of more than 20 percent annual
increases over the past five years, a rise of more than 25
percent is not impossible next fiscal year despite the start-up
problems expected in the enforcement of the new tax laws
beginning this month. Even though the income tax rates were
lowered from a range of 20 percent to 35 percent to between 15
percent and 30 percent, the broadening of the tax base in terms
of both taxpayers and tax objects is expected to more than offset
the impact of the lower rates.

A nominal increase of up to 15 percent in the total budget
volume, therefore, is highly probable. But that is not a hefty
increase at all, given the inflation of around 10 percent last
year. Such expansion is barely enough to meet the minimum 15
percent rise in routine (recurring) spending required next fiscal
year even without an across-the-board increase in personnel
salaries. The increases in expenses will be incurred through the
periodical grade promotions among the government personnel, the
10 percent rise in pension pay effected as from this month, the
maintenance and operation costs of newly completed development
projects and the increase of at least five percent in foreign
debt service payments due to the depreciation of the rupiah.

Budget appropriations for investments (development budget) are
estimated to decline again in real terms as they have in the
current fiscal year. It is encouraging, though, that the
remarkable achievements in the privatization of such basic
infrastructure as power generation and telecommunications will
enable the government to focus its limited investments on the top
priority sectors of human resources (education, health and social
services) and rural development.

The consequence of the bare-bones budget is obvious. The bulk
of new investments needed to fuel economic expansion will have to
be provided by the private sector. That calls for further
improvement in the overall climate for investments and further
reduction of the prevalent hurdles to business activities.