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utgoing Finance Minister Chatib Basri observed that the new government, which will take over late next month, will face increasingly bigger fiscal challenges because mandatory and fixed-spending expenditures will rise significantly while revenues will tend to follow the economic and business cycle.

Mandatory and fixed expenditures, required by the laws on education, regional autonomy and health, already take up almost 50 percent of the total budget, while other routine spending on personnel, debt servicing and energy subsidies eat up at least 40 percent, thereby leaving a mere 10 percent for investment.

Certainly, expenditures for personnel costs and debt servicing cannot be reduced. Even spending on energy subsidies, which are budgeted at Rp 363 trillion (US$30 billion) for next year, or 18 percent of the total budget, can be decreased only gradually to avoid too shocking of an impact on inflation. Therefore, taxation is the only sector that has the potential for generating additional revenues to increase budgetary appropriations for investment.

Chatib therefore suggested that the new government intensify tax collection from the upper-middle income and top rich families and diversify corporate income tax revenues, which now depend too heavily on mining, plantations and big manufacturing industries, into other sectors, such as property developers and services.

Tax collection from high income families can be increased if tax officials can have access to data on property and car ownership and financial transactions by individual taxpayers. The Rp 4.4 trillion income tax collected from rich individuals last year was quite meager, given the number of rich families in the country.

Taxpayers are required by law to declare all their financial and fixed assets in their annual tax-return filings, such as deposits at banks, bonds, investments, cars, houses, etc. But these declarations have never been complete because of an acute lack of law enforcement, so that tax auditors are not able to verify peoples'€™ income taxes against their real financial and fixed-asset holdings.

But a more concerted tax campaign should be supported with a significant annual increase in the human resources of the Taxation Directorate General because, even measured in international standards, the number of tax officials (33,000 currently) only meets one-third of the real need. Only with the recruitment of more qualified tax auditors will the tax office be able to properly assess income tax in the various industrial sectors.

However, Chatib'€™s suggestion for restructuring the four layers of individual income tax rates, which are seen as too much in favor of high-income families as the highest rate of 30 percent applies only to annual income of over Rp 500 million, could be more politically challenging as it requires the amendment of the Income Tax Law.

The government should therefore focus, at least in the short term, on reforms that do not need prior House of Representatives approval.