The amendments to the 2015 state budget that were approved by the House of Representatives last week slightly decrease total government spending this year to Rp 1.9 quadrillion (US$ 148.2 billion) but in the long-term will be good for the economy because public investment for basic infrastructure, bureaucratic reform and spending on social benefits will almost double from last year.
The more than 50 percent increase in capital expenditure will be made possible by the big savings on fuel subsidies brought about by declining oil prices and the introduction of a fixed-subsidy system for fuels widely used by low-income people and fishermen.
Judging from the function of the state budget as a communication system, conveying signals about government behavior, prices, priorities and commitments, the macroeconomic indicators assumed for revenue and expenditure projections for the budget seem rather realistic, assuring the market that there will not likely be painful surprises during the current fiscal year.
The Rp 12,500 average rupiah exchange rate, $60/barrel oil price and interest rate of 6.2 percent assumed for the budget are realistic.
The amendments to the 2015 budget were necessary not only because of the significant changes used for the macroeconomic assumptions. The changes also are needed to fit in with the top priority programs of the new government of Joko 'Jokowi' Widodo.
Jokowi's economic platform focuses on food, energy and infrastructure, which are truly the basic needs for the nation to strengthen its economic resilience and competitiveness. Food and energy security is key to a nation's political and economic stability. Therefore, the Jokowi programs to open 1 million hectares of new rice fields outside Java and build new irrigation networks for 3 million ha of rice fields, seaports, airports and roads are quite appropriate.
If we're really serious about the long-run performance of the economy, we need to abandon the quest for short-term fixes and radical solutions. The mass media may hunger for novelty and drama. But when it comes to global uncertainty, stability and security seem the safest route right now.
Investing in infrastructure will make transportation and communication more efficient, improving connectivty within the country and with the outside world. If we want to talk about mid- and long-term growth, we have to talk about policies that are familiar.
The biggest challenge for the government is to speed up the execution of its investment budget, notoriously always short of the target.
But the good news is that the bulk of the almost Rp 40 trillion in budget appropriation for additional equity capital injection for state companies will go to firms engaged in the development and operations of basic infrastructure, such as general contractors, seaports, airports, public housing and railway lines. These state companies will be able to increase their borrowing capacity for financing infrastructure projects by leveraging fresh capital.