T

he first daunting task for newly installed Finance Minister Chatib Basri will be to convince the House of Representatives to immediately approve the revised 2013 state budget. The immediate approval of the House is critical, because the draft budget will deal with two major blows: the downward revision of tax revenue and the upward revision of the energy subsidy albeit after a proposed price increase for subsidized fuel.

The deficit will hit 2.5 percent of gross domestic product (GDP), closer to 3 percent, the maximum threshold allowed by law.

A significant downward revision of projected GDP growth has affected the projected tax revenue. It was projected that government tax revenue would be Rp 1.139 trillion (US$117 billion) or Rp 54 trillion less (4.5 percent) from the approved 2013 budget. The shortfall comes entirely from income tax. Compared with the 2012 budget outturns, it was a 16 percent increase, or 12.1 percent of GDP. This is more realistic than the original budget, where it was projected that tax revenue would reach 13.2 percent of GDP.

A full point increase in the percentage of GDP is quite unrealistic, as historically, the increase in tax revenue in terms of GDP percentage was between 0.1-0.2 percentage points.

Despite lower GDP growth projection in the revised 2013 budget, the government still believes that consumption will remain strong, as assumed in the original budget. But higher inflation and higher interest rates that will be faced by Indonesian consumers will weaken consumption. That is why value added tax (VAT) should be projected as lower than the original budget.

And if the past proportion of VAT relative to total tax revenue was to be any guide at 35 percent, then VAT would be Rp 25 trillion (6 percent) lower than Rp 424 trillion in the original budget. This indicates that the shortfall in the total tax revenue could be 46 percent higher than projected in the revised 2013 budget.

It is unclear if the projected tax revenue has taken into account more tax incentives being considered by Chatib. Tax revenue could be affected by the government'€™s more aggressive stance on providing tax incentives to boost investment. Once considered a taboo, where any request or proposal for tax incentive from businesses always fell on the deaf ears of the government, tax incentives have become buzz words these days.

The government has adopted a more flexible stance on tax incentives. Chatib, a former chairman of the Investment Coordinating Board (BKPM), has promised to be more generous in providing tax incentives to industries in order to forestall the slowdown in investment growth.

Tax revenue could have been higher if bureaucratic reform was carried out more vigorously. Corruption at the Directorate of Taxation is still rampant and collusion between tax officials and corporate tax payers is still widespread as demonstrated by the recent prosecutions of tax officials by the Corruption Eradication Commission (KPK). The amount of money involved in tax corruption cases is believed to be just the tip of the iceberg compared to the amount actually pocketed illegally by tax officials. Combating corruption and minimizing losses from tax fraud at the hands of tax officials should remain a top priority of the Finance Ministry.

Despite the planned price increase in subsidized fuel (44 percent for low octane gasoline and 22 percent for diesel fuel), the energy subsidy will rise from the approved budget by Rp 35 trillion (12.7 percent) to Rp 310 trillion. Three factors accounted for this significant increase: a higher import volume, because of higher fuel consumption and lower domestic oil production; higher oil prices; and steeper rupiah depreciation.

The amount of subsidy will depend on the timing of the price increase. If the price increase is delayed further, the subsidy will be higher. It is thus crucial that the House approves the revised 2013 budget immediately.

To protect the poor from the adverse impacts of price increases in subsidized oil, the government will provide temporary direct cash aid (BLSM) totaling Rp 11.5 trillion to 15.5 million poor households for five months. As the disbursement of BLSM will be taking place less than 12 months before the general election, it is becoming a contentious issue, and indeed it is difficult to reject the allegation that this populist handout to the poor is not politically motivated.

Chatib, with the backing of some coalition political parties, should be able to diffuse opposition in the House against this policy and prevent this issue from becoming a political soccer. And more importantly, the controversy surrounding this issue should not be allowed to derail subsidy reform.

The seemingly high increase in material and capital expenditure in the revised 2013 budget (by 35 percent and 30 percent respectively) from expenditure in 2012 was due to under spending in the material and capital budget in 2012. Due to weak implementation, actual capital and material expenditure in 2012 were 83 percent and 70 percent of their budgets, respectively. Weak budget implementation has been a chronic problem for the government, preventing the budget from achieving its optimal contribution to economic growth.

Due to their performance in budget planning and implementation, bureaucrats in various ministries '€” fearing that unspent budget will '€œevaporate'€ '€” rush in spending their budget in December. The result is that budget disbursement in December reached 2.5 times the monthly average. More than half of capital expenditure was spent in the last quarter of 2012. The rush to spend at the end of the year definitely affects the quality of spending and opens opportunity for abuse and corruption. This is one area that Chatib should focus on.

The increase in budget deficit by Rp 80 trillion (52 percent) will require higher debt financing by the government. The main instrument of this debt financing is treasury notes (SBN), and the government will have to issue Rp 241 trillion this fiscal year, or Rp 61 trillion more than originally budgeted. Since there is much uncertainty and volatility in the financial market, the government has to be more prudent in weighing costs and risk on its debt issuance.

Since Standard and Poor'€™s rating agency downgraded Indonesian sovereign debt and gave the perception in the market that reform momentum had stalled and that there would be some disturbances in the macro economy in the second half of the year, it is possible that yields on government bonds will rise, adding an interest cost burden. This will be another blow for the government.

The writer is an economist.