TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
Jokowi's budget aims for economic liftoff
A new dawn: The first stage of the expansion of the countryâs busiest port, Tanjung Priok in North Jakarta, is expected to be completed by the end of this year
Change Size
A
span class="inline inline-center">A new dawn: The first stage of the expansion of the country's busiest port, Tanjung Priok in North Jakarta, is expected to be completed by the end of this year. The port expansion is one of the government's infrastructure development priorities to ease distribution bottlenecks. (JP)
Investors wishing to see liftoff in the Indonesian economy are pinning high hopes on the revised 2015 state budget, which provides a significant boost for the economy following the removal of costly fuel subsidies and a sharp increase in capital expenditure.
Scheduled to be endorsed by the House of Representatives either on Friday or Monday, the budget will be a crucial stepping-stone for President Joko 'Jokowi' Widodo in his bid to drive up economic growth to 7 percent, a level that Indonesia last recorded prior to the 1997-1998 Asian financial crisis, as he frequently pledged during his presidential campaign.
For the first time ever, the budget includes medium-term growth measures such as unemployment and poverty rates, human development index (HDI) and the Gini coefficient measuring income inequality, which means that the growth the country records must be enjoyed by all stakeholders in the economy.
This is something that was pushed by lawmakers from the Indonesian Democratic Party of Struggle (PDI-P) during budget discussions in the early years, when the PDI-P still acted as an opposition party.
Inheriting an economy that has been slowing for three consecutive years, Jokowi introduced a revamp in the state budget in which he planned a shopping spree on growth-generating infrastructure projects.
The budget posture, which revised the budget formulated by former president Susilo Bambang Yudhoyono, plotted total spending of Rp 1.98 quadrillion (US$150.2 billion) for this year, compared to Rp 2.01 quadrillion in the original budget.
Though featuring lower expenses, the budget is seen as healthier than the original budget, as it marks the first time in a decade that ministries' spending will surpass non-ministry spending, which historically always soared due to the unproductive fuel subsidies.
The government also took full advantage of falling oil prices to overhaul its fuel-subsidy system in the budget. It marked the first time in more than 30 years, or since the era of former president Soeharto, that an Indonesian state budget removed the subsidy allocation for Premium gasoline, which has become a fiscal burden in recent years.
With the removal of the subsidy for the widely used gasoline, the fuel subsidy spending allocations will shrink significantly from the previous Rp 276 trillion to Rp 81 trillion in the revised budget.
Instead, the funds will be allocated for more productive spending under the classification of capital expenditure (capex), or capital investment in ministries that includes infrastructure projects, the allocation of which will be increased from Rp 156.4 trillion in the original 2015 state budget and Rp 190 trillion last year, to at least Rp 290 trillion this year.
Possessing a 1.9 percent gross domestic product (GDP) fiscal deficit but with most of the funds earmarked for productive purposes, the revised 2015 state budget would be the best budget posture that Indonesia has had in recent years, the closest to what economists described as an 'ideal' fiscal setting, Finance Minister Bambang Brodjonegoro once said.
'Our current fiscal space is very healthy, so if there is someone in this room who isn't optimistic about our economy, please raise your hand and I will clarify [your concerns] with better economic explanations,' Jokowi said at an economic discussion held in Jakarta.
The Jokowi administration has already revealed plans to build 49 new dams, develop 24 seaports and establish new power plants with a combined capacity of 35,000 megawatts within five years. Given the already available funds, some of the projects could commence as early as this year, the President said.
The state spending would also be safeguarded by the maiden implementation of a fixed-subsidy scheme that would protect the Rp 64.7 trillion fuel-subsidy allocation for diesel fuel, kerosene and liquefied petroleum gas (LPG) against external risks stemming from any unwanted fluctuation in the exchange rate and oil price.
In 2014, all ministries under then president Susilo Bambang Yudhoyono were forced to cut a combined Rp 43 trillion in their spending as the sharp depreciation of the rupiah drove up fuel-subsidy spending from its initial allocation, thus eating up the fiscal space.
This year, the government assumed the rupiah would trade at 12,500 per US dollar and the oil price would hover at $60 per barrel. Other macroeconomic assumptions include a growth target of 5.7 percent, inflation of 5 percent, the yield of three-month treasury bills of 6.2 percent, oil production of 825,000 barrels per day (bps) and gas lifting of 1.2 million bpd of oil equivalent.
While being optimistic on the budget's role in spurring growth, Bambang nonetheless warned about challenges on the revenue side.
The budget targeted total state income to hit Rp 1.75 quadrillion this year, higher than Rp 1.63 quadrillion last year, but relatively unchanged compared to Rp 1.76 trillion in the initial plan drafted by the previous government.
Among economists, there is a big question mark remaining on whether such a target can be achieved, given the ongoing economic slowdown affecting local corporates' revenues and tax payments, as well as the bleak outlook in oil prices that would affect non-tax revenues (PNBP) collected from oil and gas firms.
The risk notably comes from tax revenues, the collection of which is expected to exceed Rp 1.48 quadrillion this year, a significantly higher target compared to 1.24 billion last year.
Indonesia only succeeded in meeting its tax revenue target twice over the last 10 years. In 2014, the country's tax collection target fell short of its initial target by a staggering Rp 102.8 trillion.
'Our biggest challenge here is how to meet our tax collection target because if the tax revenues are lower than targeted, the impact will be felt in other aspects of the state budget,' said Bambang.
To collect revenues and broaden the tax base, the government has planned a massive overhaul in its tax system, including a controversial plan to launch a tax amnesty ' a policy that waives off past penalties and prosecutions for offshore-based Indonesians failing to comply with their previous tax obligations, in a bid to lure them to reinvest money in the country.
At 1.9 percent of GDP, the revised 2015 state budget's fiscal deficit ' the gap between revenues and spending ' is lower than 2.3 percent of the original budget, but Bambang has acknowledged that the figure could tick upward if the tax reforms fail to deliver.
Nevertheless, the budget is not without imperfections, with concerns over highly politicized programs with questionable governance and supervision schemes after they are implemented.
The government decided to upsize the allocation of village funds distributed to thousands of districts and subdistricts across the archipelago to Rp 20.8 trillion this year, an Rp 11 trillion increase compared to last year, with minimal supervision on how to spend the funds.
Past experience has shown that regional leaders, even at provincial or regency levels, had low spending rates given their lack of project planning and human resources capacity, as every year a big chunk of the state budget's idle and unused funds (Silpa) came from funds earmarked for regional governments.
There was also controversy surrounding Jokowi's plan to inject Rp 40.7 trillion of funds to state-owned enterprises (SOEs) in strategic sectors, which in the past have been notorious as lucrative cash cows for politicians.
Analysts from Nomura Holdings Inc., a Japan-based fund manager, warned that the process of capital injection to SOEs could easily be politicized, given the unclear mechanism to decide on the amount given to each institution.
'Some of these institutions are already highly leveraged and will likely need structural reforms,' Euben Paracuelles and Lavanya Venkateswaran, analysts from Nomura, wrote in a report distributed to their investors.
'These reforms have yet to progress in earnest, so it seems the missing piece in this strategy is how the capital injections will be used to incentivize SOEs to accelerate these reforms and ensure no leakages,' they argued.
