The latest budget disbursement data shows mixed signs with productive capital spending almost tripling, while overall spending remains low and cash remains tight.

The government spent Rp 10.2 trillion (US$775.2 million) on capital expenditure in the first three months of the year, mainly to fund infrastructure projects, versus Rp 3.9 trillion in the same period last year.

The government’s efforts to speed up spending by enabling early bidding for this year’s infrastructure projects, such as roads and bridges, since November last year have borne fruit, although the results are not as sweet as expected, said Maybank Indonesia chief economist Juniman.

“There has been an uptick in capital spending thanks to the early bidding system,” he said.

President Joko “Jokowi” Widodo is putting infrastructure first during his five-year tenure, as he considers that solving the nation’s infrastructure bottleneck could unleash growth potential of up to 7 percent.

However, despite the strong indicator on infrastructure spending, the overall reading was not satisfactory. The central government spent Rp 193.5 trillion until March, only 14.6 percent of the overall Rp 1.3 quadrillion spending budget. That compares with Rp 197 trillion in the same period last year, about 14.9 percent of the whole budget.

The situation is different with local administrations, which saw transfers rising to Rp 197.4 trillion by March this year, from Rp 170.4 trillion in the same period last year.

The state budget allocated around Rp 2 quadrillion for overall spending this year, more than half of which is in the accounts of the central government.

“The government needs to apply a reward and punishment system for state budget spending by local administrations to ensure productive and efficient spending that can affect economic growth,” Juniman said.

Indonesia’s economic growth slowed to a six-year low of 4.79 percent last year due to an export slump and weak purchasing power. Hence, high hopes are pinned on government spending to drive growth, as it expects economic growth to reach 5.3 percent this year.

Some economists highlight low tax collection as causing more problems for the state budget and the overall economy, because the cash-strapped government cannot expand its infrastructure projects with limited available funds.

Tax revenue reached Rp 188 trillion as of March, lower than the Rp 203 trillion booked in the same period last year. This is especially alarming with a 30 percent increase in tax income expected by the government this year.

An expected shortfall of Rp 290 trillion in state income, including taxes, has caused the government to slash its spending in the revised 2016 state budget that will be deliberated at the House of Representatives this month.

For ministries and agencies, a total of Rp 45.5 trillion is expected to be slashed from the state budget, driven by revenue shortfall on the back of a weak domestic economy and plunging commodity prices.

The Public Works and Public Housing Ministry, which is a crucial part of Jokowi’s infrastructure push, expects to see its budget slashed by Rp 8.4 trillion from an initial Rp 104.1 trillion.

“The cut is somehow a blessing in disguise as it can prop up our spending progress,” said the ministry’s secretary-general, Taufik Widjoyono.

The ministry spent more than 8 percent of its budget as of March, still short of its 11 percent target for the period. Taufik admitted that nomenclature issues in several agencies and land acquisition problems in several toll road projects had hampered spending.

Meanwhile, Bank Central Asia (BCA) economist David Sumual expressed concern about the low tax revenue, as it indicated economic activities had yet to recover.

Low tax revenue collection last year saw the country book a 2.5 percent state budget deficit from gross domestic product (GDP), higher than its initial target of 1.9 percent and inching closer to the 3 percent threshold required by law. The government is targeting a 2.1 percent deficit this year.

“We are concerned about a wide budget deficit,” David said.
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