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Jakarta Post

Budget capacity before fancy programs

It is now official that Indonesia’s presidential election will offer a choice of two candidates, Joko “Jokowi” Widodo of the Indonesian Democratic Party of Struggle (PDI-P), who is paired with Jusuf Kalla, and Prabowo Subianto of the Gerindra Party, with running mate Hatta Rajasa

Erick Hansnata (The Jakarta Post)
Canberra
Mon, May 26, 2014 Published on May. 26, 2014 Published on 2014-05-26T08:59:15+07:00

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Budget capacity before fancy programs

I

t is now official that Indonesia'€™s presidential election will offer a choice of two candidates, Joko '€œJokowi'€ Widodo of the Indonesian Democratic Party of Struggle (PDI-P), who is paired with Jusuf Kalla, and Prabowo Subianto of the Gerindra Party, with running mate Hatta Rajasa.

Well, it is a good thing, as we will have a one-round presidential election, reflecting efficiency and saving people'€™s money.

Both candidates have unveiled their missions and working programs but their plans seem mediocre in that they include such standard programs as bureaucracy reform, expanding infrastructure, welfare improvement and support for small businesses.

They do not realize that the key issue in this government is the fiscal sustainability of the state budget.

In countries where a democratic system is well-established, candidates start with their plan to manage the state budget. Why? The reason is so that voters can measure whether all the offered programs, such as those in education and health, welfare, even energy reform, are achievable or only dream statements.

For example, David Cameron won the UK election in 2010 because of his plan to cut spending, especially the operational costs of government, to give the country sufficient fiscal space to boost its economy, and then reduce the unemployment resulting from the global financial crisis.

How about Indonesia? We have become certainly well-known as a country with continued economic growth '€” around 5.5 percent in the last decade based on World Bank data. The basic principle of economics states that high growth will be followed by increasing income tax, therefore providing the government with more fiscal space.

Indonesia'€™s budget actually increases every year, both in terms of revenue and spending.

However, we act like a country applying tight austerity measures, with no room for expansion or investment.

Let'€™s look at the 2014 state budget (APBN 2014) based on Law No. 23/2013. From the total revenue of Rp 1,667 trillion (US$144 billion), 27 percent was allocated for routine spending (salaries and allowances) in the central government, 36 percent was to be transferred to the regional governments (DAU/DAK) where most of it was also for routine spending, and 20 percent was for education.

With a fuel subsidy of as much as Rp 290 trillion already taking up 17 percent of the total budget, there is only a tiny sum left for investment in infrastructure development.

So, what are the fiscal messages of Jokowi and Prabowo? They should begin with a '€œbudget revolution'€ to remove the fuel subsidy in a structured manner.

Candidates with a '€œmental revolution'€ platform should have the courage to deal with this '€œcancer'€, and make it disappear completely within a five-year term by fixing a 20 percent reduction every year.

It means that the allocation of the subsidy should be fixed and not adjusted in the annual budget whenever oil prices rise.

The biggest opposition to curing this cancer is actually the government itself, as government leaders do not have the political courage to take bold measures, and coalition partners do not want to look bad in the eyes of their constituents.

Although Prabowo said in the media that he would reduce the fuel subsidy, he does not state this clearly in his nine pages of action programs for national transformation.

He said he will reform the government budget but he stops short of mentioning how he will go about reducing wasteful spending. Jokowi has also expressed a commitment to phasing out fuel subsidies but he has not yet provided details on how his government would do so.

The political courage of a candidate to offer something unpopular by committing to reducing the fuel subsidy actually sends two signals.

First, it shows an assertive gesture that the candidate has the integrity to build a credible new government that is able to cut down fuel subsidies while at the same time protecting poor people from the impact of such cuts through social safety-net programs.

Second, a plan to reduce the fuel subsidy through structural reforms would make it easier for people, businesses and investors to manage their expectations as they would have more time for adjustment.

The era of our '€œcosmetic'€ government will soon be over, and we need an honest, credible and decisive leader for the future.

For an honest leader, admitting that the government has no capacity to reduce the fuel subsidy and therefore needs '€œa budget revolution'€ should be a top priority before implementing any other programs.

We need a credible and a decisive leader who can simultaneously produce policies that improve people'€™s welfare, and convince the people that the short-term pain will result in long-term prosperity.

The writer is researching economics at the University of Canberra'€™s Institute for Governance and Policy Analysis, Australia.

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