SBY’s limited
fiscal space
|
Winarno Zain ; An Economist
|
JAKARTA
POST, 22 Agustus 2012
One of the reasons why the state
budget has not played a major role in Indonesian economic growth is because it
is being plagued with three suffocating problems.
First, corruption is eating a sizable chunk of public money. Second, it is being heavily burdened by the wasteful energy subsidies. And third, budget execution is weak, especially for capital projects.
In his state-of-the-nation speech on the eve of Independence Day, President Susilo Bambang Yudhoyono acknowledged the first two problems. But that was enough of a warning sign that the 2013 state draft budget being presented to the House of Representatives for approval would suffer the same fate as budgets in previous years.
Total expenditures in the 2013 budget are planned to increase by 7.1 percent to Rp 1,657.9 trillion (US$176 billion), implying a real growth after inflation of only 2 percent. Given the three aforementioned problems, the impact of the budget might not be as expansive as it looks.
Yudhoyono rightly acknowledged the importance of prudent fiscal policies and a healthy fiscal stance because these conditions are required not only for supporting development but also to respond to a global economic crisis that might erupt again.
Clearly, the risk of Indonesian GDP growth slipping as a result of the unresolved eurozone crisis is on Yudhoyono’s mind.
The President should have used the opportunity to warn the country not to be complacent amid strong economic growth in the first half of 2012, because the outlook for the world economy is getting more uncertain with the eurozone entering into recession in the second quarter.
Looking at 2013, the outlook for the world economy depends on whether the economy slips further into recession. All eyes are now on the US Federal Reserve and the European Central Bank. They have recently been under pressure to take more decisive action using monetary stimulus options, which are seen as the last hope for economic recovery in developed economies.
However, the central banks are still reluctant to use their “bazookas”, preferring instead to let policymakers in each country to solve their own problems.
Yet if the economy continues to worsen, the central banks will act and the monetary easing will be cheered by the market. This would be positive for Indonesia, even though the immediate effect would be felt in the financial sector.
As capital inflows rise, stock prices would gain, yields on government bonds would come down and the rupiah would strengthen.
Yudhoyono’s speech was made on the back of solid Indonesian GDP growth in the second quarter of 2012. It grew 6.4 percent in the second quarter, slightly higher than 6.3 percent in first quarter.
Looking at the growth trend between the first and second quarters, while private consumption was slightly higher, there have been significant increases in government consumption and investment growth.
As a sign that investment flows remain strong, the largest source of growth in first half of 2012 came from investment (2.9 percent), higher than from consumption (2.8 percent). On the supply side, there was also a significant increase of growth in mining, finance and real estate sectors. Increased growth in mining was probably a reflection of excessive exploitation by mining companies in anticipation of the raw mineral export ban that will become effective in 2014.
However, it should be noted that some key sectors experienced slower growth, and if their growth continues to weaken for the rest of the year, it would negatively affect growth for the whole year.
Growth of processing industries, the biggest component in the GDP, weakened from 5.7 percent to 5.4 percent in the second quarter.
Even growth in transport and communication slackened to 10.1 percent from 10.3 percent in the first quarter. Reflecting the continuing fallout from the eurozone crisis, there has been a dramatic fall in
the growth of exports from 7.8 percent to only 1.9 percent in the second quarter.
However, in the draft state budget, the government assumed GDP growth would reach 6.8 percent in 2013, higher than 6.5 percent in 2012. The government believed that domestic consumption and investment would continue to be strong in 2013. This would be the case if infrastructure development could be accelerated by the implementation of the land acquisition law and its Presidential decree that was recently signed.
Total government revenue is expected to rise by 11 percent to Rp 1,507.7 trillion. In his speech, the President stressed the importance of accelerating infrastructure development to remove obstacles for sustained growth. He acknowledged that because of the expenditures on subsidies, the government had little fiscal space to deal with the growing need for capital and social spending.
Realizing that government’s funds were limited, he appealed for greater participation from the private sector and state-owned companies in infrastructure development.
He even called on regional governments to allocate more funding for infrastructure and rather than spending the bulk of their budgets on salaries and other routine expenditures.
If Yudhoyono looked at the actual budget figures for the first half of 2012, he would see how unhealthy his 2012 budget was. While energy subsidies ballooned to Rp 124 trillion, capital expenditure (mainly for infrastructure) stood only at Rp 31 trillion, exactly one-fourth of spending on energy subsidies.
In the 2013 state budget draft, capital expenditures were set at Rp 194 trillion, 25 percent higher than in the revised 2012 budget — a significant increase indeed. However, this amount is still well below the Rp 275 trillion allocated for energy subsidies.
The President should have realized that this unhealthy imbalance in expenditures between infrastructure and energy subsidies would hurt the ability of his state budget to provide additional stimulus for economic growth.
Energy subsidies, under the draft budget, increased by Rp 58 trillion or 21 percent from 2012 budget. Unless there is an oil shock that pushes up oil prices significantly, it will be difficult for the government to raise domestic fuel prices.
The government will try to control the sale of subsidized fuel, but as experience shows, amid strong growth, demand for subsidized fuel will outpace its supply, forcing the government to increase subsidized fuel sales thus raising subsidies again.
Such a scenario would represent another lost of opportunity for the government to engage in more productive spending that would benefit the poor. ●
First, corruption is eating a sizable chunk of public money. Second, it is being heavily burdened by the wasteful energy subsidies. And third, budget execution is weak, especially for capital projects.
In his state-of-the-nation speech on the eve of Independence Day, President Susilo Bambang Yudhoyono acknowledged the first two problems. But that was enough of a warning sign that the 2013 state draft budget being presented to the House of Representatives for approval would suffer the same fate as budgets in previous years.
Total expenditures in the 2013 budget are planned to increase by 7.1 percent to Rp 1,657.9 trillion (US$176 billion), implying a real growth after inflation of only 2 percent. Given the three aforementioned problems, the impact of the budget might not be as expansive as it looks.
Yudhoyono rightly acknowledged the importance of prudent fiscal policies and a healthy fiscal stance because these conditions are required not only for supporting development but also to respond to a global economic crisis that might erupt again.
Clearly, the risk of Indonesian GDP growth slipping as a result of the unresolved eurozone crisis is on Yudhoyono’s mind.
The President should have used the opportunity to warn the country not to be complacent amid strong economic growth in the first half of 2012, because the outlook for the world economy is getting more uncertain with the eurozone entering into recession in the second quarter.
Looking at 2013, the outlook for the world economy depends on whether the economy slips further into recession. All eyes are now on the US Federal Reserve and the European Central Bank. They have recently been under pressure to take more decisive action using monetary stimulus options, which are seen as the last hope for economic recovery in developed economies.
However, the central banks are still reluctant to use their “bazookas”, preferring instead to let policymakers in each country to solve their own problems.
Yet if the economy continues to worsen, the central banks will act and the monetary easing will be cheered by the market. This would be positive for Indonesia, even though the immediate effect would be felt in the financial sector.
As capital inflows rise, stock prices would gain, yields on government bonds would come down and the rupiah would strengthen.
Yudhoyono’s speech was made on the back of solid Indonesian GDP growth in the second quarter of 2012. It grew 6.4 percent in the second quarter, slightly higher than 6.3 percent in first quarter.
Looking at the growth trend between the first and second quarters, while private consumption was slightly higher, there have been significant increases in government consumption and investment growth.
As a sign that investment flows remain strong, the largest source of growth in first half of 2012 came from investment (2.9 percent), higher than from consumption (2.8 percent). On the supply side, there was also a significant increase of growth in mining, finance and real estate sectors. Increased growth in mining was probably a reflection of excessive exploitation by mining companies in anticipation of the raw mineral export ban that will become effective in 2014.
However, it should be noted that some key sectors experienced slower growth, and if their growth continues to weaken for the rest of the year, it would negatively affect growth for the whole year.
Growth of processing industries, the biggest component in the GDP, weakened from 5.7 percent to 5.4 percent in the second quarter.
Even growth in transport and communication slackened to 10.1 percent from 10.3 percent in the first quarter. Reflecting the continuing fallout from the eurozone crisis, there has been a dramatic fall in
the growth of exports from 7.8 percent to only 1.9 percent in the second quarter.
However, in the draft state budget, the government assumed GDP growth would reach 6.8 percent in 2013, higher than 6.5 percent in 2012. The government believed that domestic consumption and investment would continue to be strong in 2013. This would be the case if infrastructure development could be accelerated by the implementation of the land acquisition law and its Presidential decree that was recently signed.
Total government revenue is expected to rise by 11 percent to Rp 1,507.7 trillion. In his speech, the President stressed the importance of accelerating infrastructure development to remove obstacles for sustained growth. He acknowledged that because of the expenditures on subsidies, the government had little fiscal space to deal with the growing need for capital and social spending.
Realizing that government’s funds were limited, he appealed for greater participation from the private sector and state-owned companies in infrastructure development.
He even called on regional governments to allocate more funding for infrastructure and rather than spending the bulk of their budgets on salaries and other routine expenditures.
If Yudhoyono looked at the actual budget figures for the first half of 2012, he would see how unhealthy his 2012 budget was. While energy subsidies ballooned to Rp 124 trillion, capital expenditure (mainly for infrastructure) stood only at Rp 31 trillion, exactly one-fourth of spending on energy subsidies.
In the 2013 state budget draft, capital expenditures were set at Rp 194 trillion, 25 percent higher than in the revised 2012 budget — a significant increase indeed. However, this amount is still well below the Rp 275 trillion allocated for energy subsidies.
The President should have realized that this unhealthy imbalance in expenditures between infrastructure and energy subsidies would hurt the ability of his state budget to provide additional stimulus for economic growth.
Energy subsidies, under the draft budget, increased by Rp 58 trillion or 21 percent from 2012 budget. Unless there is an oil shock that pushes up oil prices significantly, it will be difficult for the government to raise domestic fuel prices.
The government will try to control the sale of subsidized fuel, but as experience shows, amid strong growth, demand for subsidized fuel will outpace its supply, forcing the government to increase subsidized fuel sales thus raising subsidies again.
Such a scenario would represent another lost of opportunity for the government to engage in more productive spending that would benefit the poor. ●
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