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.