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Editorial: The election-year budget
Mon, 08/18/2008 11:50 AM | Opinion
An election year usually sees a greatly expansive budget as the incumbent government works hard to attract voters by distributing political goodies.
However, with inflation estimated at around 11 percent throughout this year, the 2009 budget, proposed to parliament last week by President Soesilo Bambang Yudhoyono, represents (in real terms) a mere 2.4 percent increase in total spending to Rp 1,122 trillion (US$123 billion).
Certainly not an expansive budget, nor a pump priming one, in view of the parliamentary and presidential elections next year.
With more than 20 percent (or Rp 227 trillion) of the total expenditure allocated to subsidies (around 71 percent of this for fuel and electricity alone) and with a 15 percent pay rise for civil servants, we cannot help but see the draft budget as supporting SBY's aim to be reelected.
For the first time in the nation's history, the government plans to allocate 20 percent of its total spending to education (thus fulfilling a stipulation of the Constitution), by increasing the budget for this sector to Rp 224 trillion.
This should be a welcome development because human resources have long been one of the least developed sectors in Indonesia, blamed for an acute shortage of highly trained and skilled workers.
Yet we are a little apprehensive of how the government will go about distributing the additional budget across the educational sector, aiming for a harmonious balance between building institutional capacity and physical infrastructure.
The appropriation of Rp 142.8 trillion for poverty alleviation in rural and urban areas is a good decision given that more than 15 percent of our population of 130 million still live below the poverty line. But again, our biggest concern is the government's capacity in budget-execution.
Despite the 13.40 percent nominal increase planned in total spending, the 2009 budget will check the fiscal deficit at only 1.9 percent of the gross domestic product (GDP) -- slightly less than an estimate of 2.1 percent made earlier this year.
The government made this all possible by simply tinkering with the assumed oil price. By reducing the assumed average price of oil for the whole of next year to $100/barrel (as against the actual price of $140 in the first semester of this year) the government expects to slash fuel subsidies to Rp 101.4 trillion from an estimated Rp 180.3 trillion this year. Despite a decline in international oil prices over the past few weeks, this factor will be the biggest vulnerability of the budget.
Nevertheless, it is comforting to note that the budget plan includes a contingency allocation of Rp 6 trillion for additional subsidies -- in case oil prices do reach $130/barrel.
Other basic assumptions adopted for the budget -- including 6.5 percent inflation, an exchange rate of Rp 9,100 for US$1, GDP growth of 6.2-6.5 percent and the central bank's short-term interest rate of 8.5 percent -- all seem fairly realistic.
The projected decline in the ratio of total government debts against GDP to as low as 30 percent next year would help reduce the sovereign risk and consequently the government's borrowing costs amid the international credit crunch.
This would be greatly helpful in reducing the burden of the Indonesia's borrowing, as it will raise Rp 110 trillion ($12 billion) through rupiah and dollar bond issues to plug its budget deficit.
The government expects a 14.30 percent increase in total revenue, to Rp 1,022 trillion ($112 billion) -- not a highly optimistic target.
The surprisingly higher-than-estimated 6.4 percent economic growth (year-on-year) in the second quarter of 2007 could be a building block for consumer and business confidence in maintaining robust growth amid persistent uncertainty in the global financial market and weakening world economy.
Consequently, we believe the estimated 20 percent increase in tax receipts is not too ambitious, especially in view of the lower tax rates to be imposed under the new income tax law and a package of other taxpayer-friendly reform measures (including new procedures for filing tax returns and tax assessment). All these positive factors do not, however, allow for complacency on the part of the government.
The robust growth in the first semester was generated mainly by sky-high commodity prices (especially coal, palm oil, rubber and cocoa), but their prices seem to have peaked, and the only trend forward will likely be a decline, albeit gradual.
Moreover, non-tax revenues which are budgeted at Rp 374 trillion (or 36.60 percent of total revenue) also depend largely on royalties from minerals and other natural resource commodities.
So, all in all the market will see the 2009 spending plan as fairly realistic as it will continue in the direction of fiscal consolidation targeted by the current government -- unlike the current budget which required significant changes before it could be approved.
At the end of the day, however, a budget system is not self-contained. It doesn't operate in a vacuum, as it is influenced by external factors and entrenched patterns of inflation and structural imbalances between expectations and resources.
