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Budget instability on the rise
The government has effectively shut the door on a possible state budget revision amid rising concerns of a worsening budget deficit due to a shortfall in the ambitious tax collection target
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he government has effectively shut the door on a possible state budget revision amid rising concerns of a worsening budget deficit due to a shortfall in the ambitious tax collection target.
Finance Minister Bambang Brodjonegoro insisted on Wednesday that cash flows into state coffers remained in healthy shape despite the concerns.
'Our cash flows are far from problematic,' Bambang said. 'There is no intention at all to perform another budget revision.'
The minister explained that tax collection levels ' the realization of which had been sluggish since earlier this year ' had recently improved, with an upward trajectory especially noticeable in April.
However, many economists have argued that the upward trend in April was not surprising as tax collection is traditionally at its peak in March and April.
Even during the peak period, overall tax collection during the first four months declined by 1.3 percent to Rp 310 trillion (US$23 billion).
The government has targeted to collect Rp 1.3 quadrillion in taxes, up by 31 percent, amid a series of forecasts suggesting the target was unrealistic due to the distressed global economy that has shed exports and commodity prices.
Another indicator worth noting is the government's recent announcement that the budget shortfall stood at Rp 77 trillion in the first four months of the year.
The likelihood of the revenue collection missing its mark prompted the World Bank in March to revise up its forecast of fiscal deficit to 2.5 percent of gross domestic product (GDP) this year, from 1.9 percent in the revised 2015 state budget.
The government is required by law to keep the budget deficit ' the gap between revenues and spending ' below 3 percent.
Warnings from the World Bank, however, may have yet to include calculations of April's tax collection and President Joko 'Jokowi' Widodo's sudden policy to increase allowances for some 450,000 military personnel in May.
The government's decision not to raise the price of subsidized Premium fuel this month may have also put some weight on the state budget.
Bambang said that the government could tolerate a larger budget deficit up to 2.2 percent of GDP, but he and his deputy again dismissed any ideas of performing another budget revision.
'We want to proceed with the existing budget. If we perform another revision, we will have to undergo the deliberation process, which would cause the current budget not to be implemented properly,' Deputy Finance Minister Mardiasmo said.
The statements from the Finance Ministry's top officials contradicted that of Vice President Jusuf Kalla, who acknowledged last month that some of the budget assumptions, notably tax revenues, might need 'reevaluation' due to lower-than-expected realization.
The realization of state revenues and spending have so far underperformed the targets set in the budget, while macroeconomic indicators from economic growth, the exchange rate to oil production have all also deviated from the initial assumptions.
Goldman Sachs, a US-based investment bank, warned clients in a report released recently that there were 'some questions on the viability of the key targets' in the state budget designed by the administration.
Given the potential shortfall in tax revenues, the government may be forced to cut its total expenditure by around Rp 100 trillion to keep the budget deficit in check, according to the bank.
'We think the targeted pickup in the revenue is too high and therefore may create shortfall in revenue and therefore spending,' Goldman Sachs economist Reza Siregar said.
'We also recognize the downside risk of further delay in fiscal spending. [With a] failure to spend the budget in a timely way, investor confidence will be negatively affected,' he noted.
The growing budgetary pressures might result in the government implementing damaging policies or taxes that further exacerbate Indonesia's economic downturn, Lyall Taylor and Hendy Soegiarto from Australia-based investment bank Macquarie Group wrote in a research note.
The analysts also expressed concerns on whether Indonesian policy makers 'truly understand' the underlying and structural economic problems that they were dealing with.
'Problems are attempted to be solved by simple decrees, and the imposition of various bans, rather than reforming underlying incentives, or removing the various obstacles that exist,' they warned their clients.
'Indonesia may well be heading into a period where macroeconomic instability is going to be on the rise, and if the approach remains one of regulating to correct the symptoms rather than root causes of emerging economic problems, the policy course Indonesia takes could become highly unpredictable.'
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What the government should do to keep deficit in check
1. Revise the state budget to cut spending Cons:
- Govt loses credibility as the budget was just passed in February.
- Politicians will ask for more concessions in exchange for approving the revised proposal as they know well that the
government is desperate to keep the deficit below a 3 percent threshold as required by the law.
- If revised, technically, the proposal should be submitted in May for deliberation in June as the House of
Representatives will be in recess in July. A budget revision is difficult to carry out in August as the House and the
government will start the 2016 state budget deliberations that month.
- The government is required to freeze budget spending, except for wages and other routine expenditures, while the
revision is carried out.
2. Limit or delay budget execution Cons:
- Economic growth will be impacted as the government has promised to propel the economy through capital
expenditure, mostly for infrastructure, amid a distressed global economy that has severely hit exports and
commodity prices.
- The capacity of the government will be put into question as it fails to properly execute the spending.
- The policy is unlikely to be sufficient to cover the massive deficit.
3. Bilateral or multilateral borrowing Cons:
- Usually entails strict requirements that may harm national interests.
- Contravenes presidential campaign promise of cutting foreign borrowing.
