Happy days: President Joko âJokowiâ Widodo (third left, first row) and First Lady Iriana (third right) pose with (from left, first row) former president Megawati Soekarnoputri, Regional Representatives Council chairman Irman Gusman, Mufidah Jusuf Kalla and Vice President Jusuf Kalla after attending the Peopleâs Consultative Assemblyâs (MPR) annual session in Jakarta on Friday
Undeterred by rising external risks, President Joko 'Jokowi' Widodo unveiled on Friday an expansionary 2016 state budget proposal as he based his growth-minded economic agenda on the large-scale disbursement of regional funds and aggressive tax cuts.
In his speech, the President did not mention possible external risks next year, such as the looming US interest rate hikes. He also based his assumptions on the fact that Indonesia, which has been among the countries suffering the hardest from the financial market crises in China and Europe, would overcome external shocks without problems.
'It is not the first time we have experienced such economic turbulence. We have withstood it so many times. We are optimistic that we will be able to surmount it,' Jokowi said.
Economists have called for Jokowi to prioritize stability over growth, but instead the President laid out what he called an 'expansive' budget policy that would drive up growth to 5.5 percent and strengthen the rupiah to 13,400 per US dollar next year.
The robust economic expansion would be underpinned by investment, which the government assumed would grow by 7.3 percent throughout 2015. So far, moderating investment and weakening exports have served as a drag to growth, pushing down economic expansion to a six-year low of 4.7 percent in the second quarter.
Meanwhile, next year the President assumed the budget deficit ' the gap between state revenues and spending that indicates fiscal healthiness ' would be 2.1 percent, higher than the 1.9 percent listed in the revised 2015 state budget and slightly lower than the budget deficit in 2014, which was 2.3 percent.
Compared to this year's budget, total state spending for next year is expected to increase 6.9 percent annually to hit Rp 2.1 quadrillion (US$152.5 billion) next year, while state revenues are targeted to rise 4.9 percent to exceed Rp 1.8 quadrillion.
'As a consequence of the acceleration of infrastructure development, the government is in need of an expansive fiscal policy, resulting in a budget deficit,' Jokowi said.
To finance the budget deficit, 'the sources of foreign financing are chosen selectively so that they are not binding and have lower costs,' he added.
To boost growth next year, the government will rely on growth-generating infrastructure projects and capital expenditure (capex) spending that will rise to Rp 313.5 trillion from Rp 290.3 trillion earmarked this year.
Finance Minister Bambang Brodjonegoro said that the government would also provide fiscal incentives such as a possible cut in institutional income taxes, as well as providing more funds to regions to boost growth at regional levels.
Regional transfer and village funds will increase 17.7 percent to Rp 782.2 trillion this year, surpassing total ministries' spending of Rp 780.4 trillion ' the first time ever that funds for regional governments will surpass those earmarked for central government ministries.
The significant increase in regional funds next year showed that the government was really serious about its economic decentralization mission, with the responsibility to spur growth now lying on the shoulders of local leaders, said Bambang.
But the finance minister also made no secret of his preference for Bank Indonesia (BI) to lower its interest rates so that the government's economic growth target could be achieved.
For the central bank, 'there might be a window of opportunity [to cut rates], maybe in December,' said Bambang.
The 2016 state budget proposed by Jokowi did not receive a positive response from the market, as the rupiah closed 0.3 percent lower while the Jakarta Composite Index (JCI) was relatively unchanged.
The budget will need approval from lawmakers, with discussions beginning as early as next week.
In his speech, House Speaker Setya Novanto, who comes from the opposition Golkar Party, suggested the government should remain watchful over possible external shocks that could destabilize the economy.
'In the volatile global economic environment, our economic policy going forward should be based on cautiousness. As a pillar for our national economy, the 2016 state budget should act as the stabilizer for our development,' said Setya.
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