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Jakarta Post

The distressful state of the state budget

  • Winarno Zain
    Winarno Zain

    Commissioner in a publicly listed oil and gas service company

Jakarta   /   Thu, August 4, 2016   /  08:01 am
The distressful state of the state budget Indonesia's new Finance Minister Sri Mulyani Indrawati speaks to the media after her inauguration ceremony at the State Palace in Jakarta, Wednesday, July 27, 2016. Indonesian President Joko "Jokowi" Widodo announced a new Cabinet on Wednesday that puts a retired general linked to human rights abuses in charge of security and returns the popular reformist to the finance ministry. (AP Photo/Tatan Syuflana)

Sri Mulyani Indrawati has returned to the Finance Ministry as the newly appointed finance minister at a time when state finances are in distress. 

She is tasked with improving the health of state finances by speeding up tax collection, while on the disbursement side, she will have to ensure state expenditure is disbursed in a timely manner and ensure that the public gets maximum benefit from every rupiah that the government spends.

At the end of June, half way through the budget year, state revenue was only 35 percent of the revised budget. 

The deficit rose to 1.85 percent of gross domestic product, more than twice the deficit in the corresponding period in 2015. Half-year revenue has been declining since 2014, falling by 2 percent in 2015, and again by 9 percent in 2016.

This is unprecedented, at least since the 1970s under the Soeharto government.

State expenditure was Rp 865 trillion (US$65.7 billion), or 41.5 percent of the budget, which is a better achievement than revenue performance. 

However, this was mainly due to routine expenditures like salaries and subsidies, the implementation of which involves no complicated procedures. 

Expenditures, meanwhile, which are more significant for economic growth, still lag behind. The Transportation Ministry, which deals with the most infrastructure expenditure, for instance, has disbursed only 28 percent of its allocated budget in the first half of the year, despite its hard work to start bidding earlier than in the past.

In the revised 2016 budget, income tax is expected to amount to Rp 856 trillion, or 42 percent more than in 2015. 

However, this includes Rp 165 trillion expected from the tax amnesty implementation. 

Excluding this amount, income tax would be only Rp 691 trillion, or 15 percent higher than in 2015. Given the still weak economic growth and the fact that income tax only increased 8 and 10 percent in the last two years respectively, a targeted 15 percent increase (excluding tax amnesty revenue) still looks too high and difficult to achieve. 

Bank Indonesia (BI), the central bank, does not believe that the government will collect Rp 165 trillion in the tax amnesty program. 

BI forecasts that at most the government will only collect Rp 50 trillion, less than one-third of its forecast. This is probably more realistic. 

The same has also happened with the value added tax (VAT) trend. Because of weakening growth in the economy, VAT growth collapsed. In 2013, VAT grew by 14 percent. 

However, in 2014, its growth fell dramatically to only 6.2 percent and again plunged to 3.7 percent in 2015. This occurred despite relatively strong growth in consumption, which has been growing at more than 5 percent since 2012. 

This year, consumption growth will not be any better than in previous years, but the government has budgeted an increase of Rp 50 trillion from VAT, more than three times the 2015 increase, in economic conditions that are more or less the same as last year’s.

The overall picture seems as though the government has set the bar too high for the revised 2016 budget. If state expenditure is implemented as set out in the revised budget to provide meaningful stimulus for the economy, it is likely that the deficit will be higher than 2.4 percent of GDP, as projected in the budget. 

However, the threat of a higher deficit would ironically be moderated by the inability of the government ministries to fully implement their budgets, despite prodding by President Joko “Jokowi” Widodo to speed up budget disbursement. 

The President himself has asked the law enforcement agencies not to criminalize officials for any spending that inadvertently results in administrative deviations. 

As finance minister, Sri Mulyani has said she will strive to implement the budget not only as a fiscal stimulus but also as a fiscal instrument to reduce poverty and inequality. 

However, under a tighter budget, she might have to adjust the current priorities and make decisions on where to make sacrifices, whether in infrastructure spending or in spending that could reduce poverty and inequality. 

 A World Bank study found gross inefficiencies in the social programs targeting a reduction in poverty and income inequality. 

Within direct transfers, the lowest budget was spent on the most effective, the Family Hope Program (Program Keluarga Harapan, PKH), Indonesia’s conditional cash transfer program. 

Every rupiah spent on PKH reduces inequality 2.5 times more than every rupiah spent on raskin, the government’s rice for the poor program, yet the budget for raskin is 10 times higher. 

Four times more is spent on Assistance for Poor Students (Bantuan Siswa Miskin, BSM) than PKH, and according to the World Bank, because of poor targeting, BSM was even less effective than raskin. 

Programs to reduce poverty and income inequality must be deep inside Sri Mulyani’s heart. She must have noted how some Latin American countries, an area under her jurisdiction during her tenure as World Bank managing director, had significantly reduced poverty and inequality through fiscal policies. 

According to World Bank studies, Brazil, Mexico, Uruguay and Costa Rica reduced their Gini coefficient between market income and final income by between 6 and 14 percent. 

In Indonesia, fiscal policies have reduced the corresponding Gini coefficient by only 2.5 percent, the second lowest after Ethiopia. 

This shows how fiscal policies in Indonesia still have a long way to go to be effective instruments to reduce poverty and inequality, especially at a time when the state budget faces many uncertainties. 

As government revenue will still be under pressure, Sri Mulyani will have to find a way to ensure that infrastructure projects and poverty and inequality reduction programs do not hurt each other. 

 

***
The writer is a commissioner at a publicly listed oil and gas service company. The views expressed are his own.

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