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Jakarta Post

2018 state budget: Toward more inclusive growth?

Although the economy has been growing at a respectable rate of around 5 percent, many Indonesians have become restless at seeing the persistent poverty and income inequality

Winarno Zain (The Jakarta Post)
Jakarta
Tue, August 22, 2017

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2018 state budget: Toward more inclusive growth?

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lthough the economy has been growing at a respectable rate of around 5 percent, many Indonesians have become restless at seeing the persistent poverty and income inequality.

Political pressure on the government to deliver more equitable growth has been increasing, so it is understandable that the major theme for the 2018 state budget, delivered by President Joko ”Jokowi” Widodo on Aug. 16, is how to improve the lot of the bottom 40 percent of the Indonesian population.

But any efforts will depend on the government’s success in mobilizing sufficient tax revenues. The tax revenue is projected to increase by 9.2 percent to Rp 1.6 quadrillion (US$119.5 billion), but the tax-to-gross domestic product (GDP) ratio will be a mere 10.8 percent, the lowest among ASEAN countries.

This tax-revenue target should be achievable, however, not only because the economy could grow by 5 percent-plus next year, but also because tax authorities have acquired a broader tax base through the tax amnesty, as well as more access to taxpayers’ bank accounts.

Tax authorities will also be helped by the implementation of Automatic Exchange of Information (AEoI), a scheme initiated by the OECD whereby Indonesian tax authorities will have access to data on Indonesian citizens’ assets that are parked overseas.

These efforts should be accompanied by tax reforms, especially in tax systems and tax administration. Along the way, in its efforts to reduce poverty and income inequality, the government might be forced to lift the taxable income cap and to provide tax incentives to business sectors that create more jobs. These could reduce the potential for tax increases.

The targeted infrastructure budget is Rp 409 trillion in 2018, a significant increase of 21 percent from the 2017 budget. This includes the planned construction of 856 kilometers of roads, 25 km of toll toads, 8,000 bridges and 635 km of railway tracks. If completed, they would improve connectivity, bolster economic activities, substantially increase employment and potentially reduce economic inequality across the country.

There are no guarantees, however, that the economic growth generated by infrastructure investment will benefit the poor more than the rich. It is true that infrastructure projects would create more jobs for unskilled workers and create more income, along with the attendant multiplier effect.

Infrastructure resources in Indonesia have clearly improved, but a number of systemic issues remain across all levels of government. These issues include the poor quality of project identification and preparation and a lack of interagency coordination, especially among regional governments that are responsible for 40 percent of the infrastructure budget.

They also include the lack of medium- to long-term planning that would ensure the continued benefits from current projects, and the lack of interest from private investors due to the government’s suppressing tariffs.

The government also has to address the poor asset management leading to rapid depreciation and premature asset failure, and the inefficient budgeting that has resulted from the fragmentation of contracts of work into small, single-year contracts.

Most of the government spending in 2018 will be in social programs, including Rp 293 trillion for poverty reduction and social security, Rp 441 trillion for education and Rp 110 trillion for healthcare. At Rp 844 trillion, the total allocation represents an increase of Rp 232 trillion, or 25 percent, from 2017. It will be twice the infrastructure budget and it will eat up more than half our tax revenues.

These programs will help reduce poverty and income inequality through various social safety-net programs, including conditional cash assistance for 10 million poor households — a significant jump from 6 million households this year — and rice assistance (beras sejahtera/rastra) for 14 million poor households.

But how effective would this budget be in reducing poverty and inequality? The social budget is dominated by education, which would only have an effect over the medium and long terms.

Moreover, the bulk of the education budget (65 percent) would be controlled and implemented by regional governments, which still lack qualified human resources.

Although education has received a sizable bulk of the budget for several years, but the quality of education delivered remains questionable.

It is notable that regional funding in 2018 will barely increase from 2017, unlike in previous years that saw large increases in regional funding every year. Regional funding is budgeted at Rp 761 trillion in 2018, compared with Rp 760 trillion in 2017.

The government is not oblivious to the fact that regional administrations still lack skills in allocating their budget, as indicated by the Rp 240 trillion idle cash in regional governments’ bank accounts. It is also common knowledge that there has been a massive abuse of village funds and imprudent spending by village heads. These minimize the trickledown effect of the scheme to villagers.

Fiscal policies alone will not be enough to reduce poverty and income inequality; they must be supported by monetary policies. Bank Indonesia (BI) has to keep inflation below 4 percent, because past empirical evidence shows that rice prices are directly linked to poverty levels.

The government must also be more vigorous in combating the business cronyism and corruption that are the roots of injustice and income inequality.
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The writer is commissioner of a publicly listed oil and gas service company. The views expressed are his own.

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