A half-baked budget for president-elect Joko Widodo Winarno Zain  ;   The writer, a graduate of the School of Economics at the University of Indonesia (UI), is a commissioner of a publicly listed oil and gas service company

JAKARTA POST , 19 Agustus 2014

                                                

                                                                                                                                   

President Susilo Bambang Yudhoyono submitted last Friday the 2015 draft state budget to a joint session of the House of Representatives and the Regional Representatives Council (DPD). However, president-elect Joko “Jokowi” Widodo would execute a budget that he was not involved in preparing. As a transition budget, the 2015 budget will not cure all of the country’s economic ills. It is a budget that mostly deals with mandatory spending, providing the legal basis for the basic functions of the government. It does not address the huge problem in infrastructure and does not address the consequences of ballooning fuel subsidies. The budget assumes gross domestic product (GDP) growth at 5.6 percent in 2015, which would be a significant increase from the 5.2 percent currently projected for 2014. If consumption growth continues to be resilient, then the GDP growth target would depend on the growth of investment and exports. But investment growth would remain subdued as most current hurdles would remain in place, such as broken infrastructure and bureaucratic red tape. In fact, infrastructure development experienced a setback this year as the Public Works Ministry will only get Rp 74.2 trillion (US$ 6.34 billion), slightly less than the Rp 74.5 trillion allocated in the 2014 revised state budget. The more serious challenges to investment are coming from policy and legal uncertainties that could worsen the investment climate. Populist and nationalistic policies that would be carried out by Jokowi would make investors more cautious. Recent developments indicate that Indonesia is becoming less open to foreign investment. Caps on foreign ownership are being extended into more economic sectors, the most recent being a proposed bill that would reduce the foreign ownership cap in the plantation sector from 99 to 30 percent. At the same time, the global financial environment would not be so favorable because global liquidity and interest rates would rise, as the US Federal Reserve ends its quantity easing monetary policies. Exports would get a little lift next year, when the export of some minerals resume, but generally it would be difficult for Indonesian exports to grow strongly next year as growth in the developed economies remains weak. Growth in China, the largest buyer of Indonesian commodities, would not make a spurt amid efforts of rebalancing its economy. Except for oil, prices of other major Indonesian commodities would remain weak. In the 2015 draft state budget, the fuel subsidy was set at Rp 291.1 trillion or Rp 44.6 trillion higher than in the 2014 revised budget, while the electricity subsidy was set at Rp 72.4 trillion. It was the biggest single increase among budget items as it represented 45 percent of the total increase in central government spending. As a net oil importer, Indonesia stands to lose from rising oil prices as higher oil prices would add to fiscal deficit through the direct impact of higher fuel subsidy spending. Last year, out of $182 billion in revenue from exports, $42 billion was used to import oil. In the first semester of 2014, Indonesia’s overall trade balance suffered a deficit of $1.2 billion, as its oil trade deficit reached $13.8 billion. With rising dependence on oil imports, fuel subsidy in the budget is always vulnerable to movement in international oil prices and rupiah depreciation. The fuel subsidy has become the single biggest risk to fiscal sustainability. The current-account deficit and the budget could cause a vicious circle that mutually reinforces each other through changes in exchange rates. As the current-account deficit is pushed higher by rising fuel imports, investor confidence gets shaken. Capital outflows would weaken the rupiah, pushing up government spending on interest payments, its fuel import bills, and ultimately the budget deficit as well. The problem is becoming worse because higher fuel subsidies have to be borne amid slower tax revenue growth. Tax revenue growth fell significantly from 20.7 percent in 2011 to 17.1 percent in 2013. In the 2015 draft state budget, the tax revenue has been projected at Rp 1371 trillion, an increase of only 8.5 percent, from the 2014 revised state budget. The risk that the projected growth of 5.6 percent would not be achieved is high, making it probable that the 8.5 percent projected increase in tax revenues would not be achieved. Corporate earnings would remain under pressure from slower growth. Revenues from value added tax (VAT) would face uncertainty, as robust consumption growth cannot be sustained when subsidized-fuel prices and electricity rates continue to be raised. As it would take time for tax reforms to have an affect on tax revenues, the most immediate measure that could be taken by the next government is to intensify tax collection from registered tax payers. There should be space to do this. There are currently 2.5 million registered companies but only 600,000 are regular taxpayers. There are more than 10 million registered individual tax payers, but only a quarter of them pay taxes regularly. The implementation of the investment budget would remain a challenge, as actual expenditures have always been less than the total budget. But next year, things might be a bit better. Last May, the Constitutional Court issued a ruling that abolished the authority of the House to attach conditions to certain budget items and restricted the involvement of the House only to policy and program levels. This ruling not only would eliminate transactional politics and corruption within the House budget committee but more importantly would reduce hurdles in budget execution, and could help speed up budget disbursement. If subsidized-fuel prices are to be increased, then the poor should be protected from the impact of the price increases. Although growth has slowed, thanks to fairly low inflation and food-price declines, the number of impoverished people will not likely increase this year. However, the depth of poverty could slightly increase. This means that the Rp 11 trillion in temporary cash assistance given to 15 million low-income households in 2013 after fuel prices were increased will not be enough and higher appropriations could be needed for cash allowances for the poor this year. The incoming government should work hard not only to implement bold fuel reforms but to also introduce tax and bureaucratic reforms. Certainly Jokowi will find that the 2015 draft state budget is not to his liking, since it does not accommodate some priority programs promised in his campaigns. So he will certainly review it. But he has to wait until March next year. ●