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Supporting investment, competitiveness through human resources
The 2019 State Budget Bill constitutes the fifth or final year of the Working Cabinet’s Development Program
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he 2019 State Budget Bill constitutes the fifth or final year of the Working Cabinet’s Development Program. During the past four years, we have laid a robust foundation by reforming the direction of national development to become more productive, more equitable and more just.
We have had to face challenges, from the fluctuation of commodity prices to the latest global economic volatility triggered by the trade policy and rise of interest rates in the United States.
In the face of such pressures, the government has moved swiftly to maintain the stability and resilience of our economy by continuing to drive competitiveness manage a productive state budget and strengthen coordination of fiscal and monetary policies. We also took firm and consistent steps to control imports.
We continue to spur exports and increase capital inflows by using fiscal instruments, providing incentives and ensuring that licensing reforms run effectively.
Thus the 2019 fiscal policy and state budget is drawn up with the theme “A state budget to support investment and competitiveness through the development of human resources”.
The government is expected to achieve economic growth within a range of 5.3 percent. The growth is expected to be more just and more equitable by encouraging faster growth in eastern Indonesia, the border regions, and other regions still lagging behind; by strengthening ultra micro, micro, small, medium enterprises and cooperatives; curbing inter-regional inequalities and reducing the gap between income groups; strengthening the village economy and reducing poverty in a more focused and faster manner.
The private sector is encouraged to play a greater role to create equitable social welfare. With the growing middle class, the domestic market is expected to be more robust. Strengthening the processing industry that can create added value needs to be encouraged and developed by strengthening the upstream to downstream industries.
The investment climate continues to be improved to make business more efficient and measurable through deregulation, de-bureaucratization and simplification. It is important to encourage particularly the small- and medium-scale industries in the manufacturing, construction and services industries, including digital-based industries that rely heavily on productive and innovative human resources.
In promoting high and inclusive economic growth, the household consumption growth needs to be sustained and investment and exports need to be increased. In 2019, the government will endeavor to maintain inflation within the range of 3.5 percent plus and minus 1 percent.
In 2019, various factors will still become challenges in maintaining the stability of the rupiah exchange rate both from the dynamics of developed countries, including the normalization of the monetary policy in the US and Europe, as well as the development of China. The rupiah exchange rate in 2019 is estimated to be in the range of Rp 14,400 per US dollar.
Trade policies and interest rate hikes in the US affect conditions in the domestic market, including the fluctuation of the three-month government treasury bills (SPN). Nevertheless, with improvements in the economy and controlled inflation, pressures from the global economy should be mitigated. The SPN rate in 2019 is estimated to average 5.3 percent.
Indonesia’s Crude Oil Price (ICP) in 2019 is estimated to average US$70 per barrel. The ICP fluctuation, coupled with the dynamics of world crude oil prices, is increasingly unpredictable. In 2019, factors that may affect world crude oil prices and the ICP are geopolitics, increasing demands in conjunction with global economic recovery and alternative energy.
The oil lifting in 2019 is estimated to reach an average of 750,000 barrels per day. Gas lifting is estimated to reach some 1.25 million barrels of oil equivalent per day. These estimates are based on production capacity and natural declining levels of oil and gas fields, additional projects that will soon be operational and planned production activities in 2019.
The above macro economic outlook constitutes the basis for drawing up the 2019 Bill on the State Budget.
The expenditures in the 2019 draft of the state budget are estimated to reach Rp 2.43 quadrillion or around 15 percent of the gross domestic product (GDP). The figure is 10 percent higher than the estimated realization of state expenditures for 2018.
The expenditures will be partly used to reinforce social protection, enhancing the quality of human resources, accelerating infrastructure development, undertaking bureaucratic reform and strengthening fiscal
decentralization.
The government remains committed to providing social protection guarantees particularly for the 40 percent of Indonesia’s population living in extreme poverty. In 2018, the government will channel funds to 92.4 million beneficiaries of the National Health Insurance (JKN) and to 10 million beneficiary families of the Family Hope Program (PKH). In 2019, the government will strengthen the PKH by raising the number of the beneficiaries to 10 million families. The government will also increase JKN recipients to 96.8 million people.
The non-cash assistance (BPNT) implemented since 2017 has benefited 1.28 million families. In 2019, it is projected to increase gradually to 15.6 million families to replace the “prosperity” rice assistance program. The government will also strengthen the Agrarian Reform and Social Forestry (RAPS) as a form of management of productive assets and support for farmers and the poor, and continue the certificates for people program with a target of 9 million land certificates in 2019.
Therefore, from 2014 to 2019, 25 million land certificates would be issued.
The most important asset for Indonesia is its people. The government has allocated a budget for education to the tune of 20 percent of the total state budget. In 2019, the budget for education is expected to reach Rp 487.9 trillion, or an increase by 38.1 percent compared to the realization of the education budget in 2014.
The growth is expected to be more just and more equitable by encouraging faster growth in eastern Indonesia.
To strengthen health care, in 2019 the government will allocate Rp 122 trillion, twice as much from the healthcare budget in 2014. Since 2016, the government has maintained the healthcare budget at 5 percent of state expenditure.
The programs have yielded concrete results as shown by the increasing equitable distribution and quality of healthcare services, availability and distribution of medicines, healthcare resources in the regions, as well as increasing life expectancy and access to sanitation.
The government will also continue the infrastructure development program. The budget allocation, which in 2014 only amounted to around Rp 154.7 trillion, was increased to Rp 256.1 trillion at the beginning of the Cabinet term in 2015. In 2019, the budget is projected to increase to Rp 420.5 trillion.
Infrastructure development strengthens connectivity, which will in turn boost economic potentials and development. It will also generate new economic activities and improve the distribution of goods and services.
We have also provided guarantees for priority energy infrastructure development programs, such as the construction of the first phase of 10,000-megawatt power plants, internet access in non-commercial and broadband areas in villages, guarantees for drinking water supply programs to 11 regional drinking water companies (PDAM), and guarantees for cooperation programs between the government and businesses.
To provide housing for the people, the government has facilitated the ownership of 781,000 housing units for low-income people through revolving funds, subsidized interest rates, down payment assistance and tax
incentives.
In 2019, we will continue to complete the infrastructure development targets necessary for regional development. The government plans to build 667 kilometers of new national road stretches, 905 km of toll roads, 48 dam units, and 162,000 hectares of irrigation networks.
In 2019, to accelerate regional development the government plans to allocate Rp 832.2 trillion in the Regional Transfer and Village Funds in the 2019 state budget. The amount rises by 9 percent from the estimated realization in 2018 or an increase of 45.1 percent from the realization in 2014, which totaled Rp 573.7 trillion.
We will make breakthroughs to accelerate infrastructure development by using non-state budget financing schemes in partnership with private parties. Amid the volatile global situation, the government will be more prudent in maintaining infrastructure financing to minimize risks and make it sustainable.
In the past few years, the increase in the budget for the Regional Transfer and Village Funds has enabled us to improve basic public services in the regions. During 2014 to 2017, the Interregional Inequality Index decreased from 0.759 to 0.668, the percentage of childbirths attended by health personnel increased from 87.1 to 93.3 percent and household access to sanitation increased from 61.1 to 67.9 percent.
The government has also fine-tuned the allocation of village funds to make them more beneficial to underdeveloped villages and severely underdeveloped villages where extremely poor residents reside. The village fund is also used for labor-intensive schemes to increase incomes and strengthen the purchasing power of villagers as well as to increase economic growth and welfare of the village community.
Thus, coupled with our sustained improvement evaluations, the government is convinced that with the Rp 832.3 trillion budget for the Regional Transfer and Village Fund in 2019, we will be able to boost equitable development throughout our 34 provinces, 508 regencies/municipalities and 74,957 villages.
The independence of the state budget is realized by further prioritizing and relying on development financing from domestic sources of revenue. This principle of the state budget independence is evidenced by an increasingly larger role of tax revenues as the main contributor of revenue.
In 2014, tax revenues accounted for 74 percent of the budget or Rp 1.14 quadrillion, and in 2018, it is estimated to account for 81 percent or Rp 1.54 quadrillion.
To support vocational education and research and development, the government will also provide a tax reduction facility.
The higher role of the tax revenues is inseparable from government efforts to improve policies, tax strategies and the implementation of sustainable tax reforms, supported by an improvement in tax compliance. In 2016 and 2017, Indonesia successfully implemented the Tax Amnesty program, a milestone of a new era of tax compliance in Indonesia.
The government will also continue to maintain the investment climate and progress of domestic businesses through tax incentives. The government has also issued special tax regulations as incentives for small- and medium-scale enterprises and to expand the tax base as a follow-up to the result of the Tax Amnesty program though Automatic Exchange of Information (AEoI).
Tax policies will also optimize information technology in supporting tax administration.
From the taxation perspective, the policy direction in 2019 will be implemented by collecting state revenue sources from national economic activities, as well as by promoting higher compliance through simpler and more transparent tax administration reforms.
[Along with] the positive development of tax revenues supported by economic growth, the tax ratio in 2019 is expected to reach 12.1 percent of GDP, rising from the estimated 11.6 percent in 2018.
The government will continue to give tax incentives through a host of instruments, namely sectoral tax incentives to support priority sectors, among others through the tax holiday policy, tax allowance, import duty exemption facility and tax subsidies; regional tax incentives, Special Economic Zones, industrial zones and bonded warehouse areas as well as special tax incentives to boost exports.
To support vocational education and research and development, the government will also provide a tax reduction facility.
The 2019 state budget financing will be carried out accountably. The budget deficit and debt-to-GDP ratio will be sustained within safe limits based on Law No. 17/2003 on state finances. Debt management is conducted in a more prudent fashion to reduce risks and costs, as well as to direct its utilization in a more productive manner in education, health, infrastructure, social protection and regional development.
In 2019, the government will continue a measured expansionary fiscal policy to boost a sustainable and just economy. The proportional expansionary fiscal policy aims to maintain fiscal continuity.
This is evidenced by the decreasing deficit of the state budget, from 2.59 percent of the 2015 GDP to 2.12 percent in 2018, and in 2019 the deficit will be lowered to 1.84 percent.
Improved fiscal policy is also evidenced by the deficit of primary balance which in 2015 reached Rp 142.5 trillion and fell only Rp 64.8 trillion in 2018 and is expected to further fall to Rp 21.7 trillion in 2019. We will therefore reach a balanced condition of primary balance or surplus in the near future.
To control additional debts, the government will also reduce budget financing in 2019 by 5.4 percent. This control measure is consistent with the measure adopted in 2018 that also reduced financing by 14.3 percent. In the previous years, we still saw an increase in financing due to fiscal expansion to stabilize and reduce the impact of the decline of commodity prices.
With the fall in the deficit in the state budget, the lower primary balance deficit, a realistic increase in revenues, with more quality and well-targeted expenditures, as well as more prudent and productive financing, the 2019 state budget is expected to be more healthy, just and independent.
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The article is an abridged version of President Joko “Jokowi” Widodo’s financial note address on Aug. 16, 2018.
