The contractive budget

With inflation estimated at around 5 percent throughout this year, the Rp 1,009.4 trillion (US$100.9 billion) budget plan for 2010 submitted Monday by President Susilo Bambang Yudhoyono to parliament is quite contractive, representing as it does a nominal increase of a mere 0.4 percent over the current fiscal year.

Yet a more negative impact on the domestic consumption is the fact that almost 47 percent or Rp 474.4 trillion of total spending next year will not generate any expansive impact on domestic market demand. That is because Rp 300.4 trillion will be squeezed out of taxpayers’ pockets in the form of income, value-added and property taxes, and Rp 174.4 trillion will be used to service domestic and foreign debts.

It is nonetheless this austerity that makes the budget proposal realistic, minimizing the downside of having to make abrupt significant amendments amid the weak global economic condition and still fragile international financial markets.

The conservative macroeconomic assumptions used for the budget estimates — economic growth of 5 percent, inflation of 5 percent, rupiah exchange rate of Rp 10,000 to the dollar, average oil price of $60 per barrel and interest rate of 6.5 percent — will likely be understood by the market as quite conservative.

The decrease in the fiscal deficit from an estimated 2.5 percent of gross domestic product this year (Rp 133 trillion) to Rp 98 trillion or 1.6 percent of GDP will strengthen fiscal consolidation, thereby further reducing the sovereign risks and consequently the government’s borrowing costs.

However, better targeting of spending will help offset the contractive impact of the budget on the economy as a whole.

The domestic market will get a significant boost from the Rp 177 trillion the government will spend on the procurement of goods, including investment, and the 5 percent raise in civil servants’ pay.

We certainly cannot decouple our economy from the impact of  global economic downturn, but the conservative spending plan based on a stronger fiscal consolidation will strengthen the market confidence in the outlook of the economy. And we have begun seeing the benefits of our prudent fiscal management as our economy bucks the deep contraction or sharp downturn experienced by most other countries, with growth of 4.4 percent in the first quarter.

President Yudhoyono hopefully meant real business this time when he asserted in his budget speech that the government would make concerted efforts to encourage investment in infrastructure projects by promoting public-private partnerships and harmonizing investment regulations. And judging from the fact infrastructure is one of the five sectors to get the biggest budget allocations next year, the early indication is positive. Big investment in infrastructure will not only strengthen market demand for a wide assortment of local goods, but also lower the costs of transportation and distribution and inflation.

The budget address also revealed several significant improvements the government will make in the budget system and the allocation of subsidies. The preparations currently underway for changing the annual budget cycle with a medium-term expenditure framework will help address investment needs for the medium term. Direct transfer of fuel subsidies to the targeted group (poor), instead of commodity-based subsidies as are now in place, will create a better atmosphere for fuel efficiency and conservation.

But at the end of the day, all these spending plans will still depend on the government’s budget execution capability. This remains our biggest concern based on our experiences this year.

Post Your Say

Selected comments will be published in the Readers’ Forum page of our print newspaper.