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Jakarta Post

Deficit rings alarm bells

  • Prima Wirayani

    The Jakarta Post

Jakarta/Nusa Dua   /   Mon, August 1, 2016   /  07:49 am
Deficit rings alarm bells

The government’s widening budget deficit may have an adverse effect on the overall economy as public spending may have to be slashed as a result of declining revenues.

The deficit problem has also led to calls by economists to raise the legal threshold for the state budget deficit — currently at 3 percent of the country’s gross domestic product (GDP) — so that the government can continue to work on many projects without having to cut spending when revenue collection is sluggish.

Halfway through the year, the state budget deficit has reached
Rp 230.7 trillion (US$17.6 billion), 1.83 percent of the country’s GDP, as a result of a tax revenue shortfall, according to government data as of June.

The figure is almost triple the amount seen in the same period last year and is already three-quarters of the overall budget deficit predicted for the whole year at Rp 296.7 trillion, 2.35 percent of the GDP.

Mandiri Sekuritas chief economist Leo Putra Rinaldy said with regard to the grim first-half figures that the government might not have the capacity to spend as much as it hoped for in order to boost growth in the persistently weak economy and would need to resort to private financing instead. Indonesia’s economy grew at a six-year low level of 4.79 percent last year although growth is forecast to recover to 5.2 percent this year.

He especially expressed concern about a repeat of last year’s situation, which saw the state budget deficit reach 2.8 percent of GDP, very near the legal threshold and far greater than the 1.9 percent target in the revised 2015 state budget, after the tax collection shortfall. The deficit then narrowed to 2.6 percent by the end of the year.

“If it takes the same path this year, investors will be reluctant to put their funds in because the government will tax everything,” Leo said during a media discussion held by Bank Indonesia (BI) in Nusa Dua, Bali, on Sunday.

The government is relying on an estimated Rp 165 trillion of its projected Rp 1.53 quadrillion tax revenue to come from its tax amnesty program, which, it is hoped, will see billions of dollars currently parked by Indonesian taxpayers overseas, declared in exchange for pardons for past tax crimes and with low penalty rates of between 2 and 10 percent.

International credit ratings agency Standard & Poor’s (S&P) has predicted a 2.7 percent budget deficit by the end of the year, raising concern over the nation’s fiscal health and leading the agency to refrain from giving Indonesia’s sovereign credit rating an investment grade earlier this year.

If the government does not cut around Rp 80 to Rp 90 trillion of its spending amid the shortfall in revenue collection, the state budget deficit could exceed the 3 percent legal limit, Bank Permata economist Josua Pardede has warned.

“The government has to have an earlier warning system in case this year’s target has been missed as well,” he said, forecasting that tax revenues would grow by 8 percent on last year’s achievement of Rp 1.06 quadrillion, this in comparison with the government’s target of an increase of better than 20 percent.

Several economists have resurrected the discourse about revising the State Finance Law, which stipulates the 3 percent deficit threshold.

Maybank economist Juniman said as a country that was still developing its infrastructure, Indonesia needed wider deficit room. Bank Mandiri chief economist Anton Gunawan expressed a similar view, saying the 3 percent limit was too rigid.

However, former finance minister Bambang Brodjonegoro was quick to dismiss the possibility. “I wouldn’t want to widen it [the deficit]. It’s already safe,” he said recently.

Newly installed Finance Minister Sri Mulyani Indrawati said her office was still thoroughly examining the state budget, which has an “ambitious” revenue target, to make it credible.
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