Working Cabinet Ministers delivered their views on 2019 State Budget on Thursday (16/08) - Photo by TheInsiderStories

JAKARTA (TheInsiderStories) – The government’s proposed 2019 State budget is quite uncommon. At first glance, the budget sends a message of fiscal moderation, with budget and primary deficit as well as debt issuance seen lower next year.

However, on the other hand, the government projected higher spending, most notable is in social assistance program which is a common pattern during the election year.

The government projected a fiscal deficit of 1.84 percent of gross domestic product (GDP) or Rp297.2 trillion (US$20.78 billion) in 2019. It was lower than this year’s 2.12 per cent of GDP, or Rp314.2 trillion rupiah.

The government planned to spend Rp2,439.7 trillion in 2019, rising by 10 percent from this year’s outlook. The spending increase will come mainly from social assistance program, rising by around Rp90 trillion, and regional transfer and village funds by around Rp68 trillion.

Infrastructure spending is projected to rise by around Rp10 trillion to Rp420.5 trillion in 2019 compared to last year. On the other hand, the government cuts spending on defense and security by around 74 trillion rupiah and projected subsidy cost to be lower by Rp8 trillion compared to this year.

Thus, it is apparent that the primary reason of the projected lower fiscal deficit in 2019 is not lower spending. Instead, it is the projected increase in state revenue.

The government’s projection for state revenue in 2019 budget is Rp2,142.5 trillion rupiah, a rise by 12.6 per cent from this year’s outlook. The tax revenue is projected to rise by 15 percent to Rp1,781.0 trillion in 2019.

The goal is quite high as the average annual growth in state revenue in the 2014-2017 period was only 3.8 percent. The government, though, has reason to be optimistic. In this year’s outlook, state revenues is projected to rise by 14.2 percent and that of tax to grow 15.3 percent.

Here is the importance to address the elephant in the room, that is the 2019 general and presidential election. While the higher spending is typical for an election year, the expected growth in revenue shows confidence that economic activities would not be disrupted by political developments.

More questions can be raised when taking into account that the government only projected economic growth of 5.3 percent in 2019, slightly higher than the expected 5.2 percent in 2018.

Furthermore, this slightly higher economic growth is mainly due to a lower growth in imports, which is a negating component in GDP calculation, while household consumption, accounting for more than half of Indonesia’s GDP, remains steady at 5.1 percent, government consumption down, at 3.0 per cent versus 4.2 per cent, and only a slight uptick in gross fixed capital formation, at 7.0 percent versus 6.9 per cent.

The most current condition showed that investment is slowing down while imports continue to surge. Indonesia’s foreign direct investment fell to $7.1 billion in the second quarter from $8.2 billion a year ago as foreign investors are staying away due to the simultaneous regional election this year.

Indonesia recorded a trade deficit of $2.03 billion in July, the largest since July 2013, as imports surged more than exports.

There are reasons to be optimistic with regards to capital formation. In the last general and presidential election in 2014, foreign direct investment grew 13 percent. However, 2014 was a different time. Back then, monetary policies in most developed nation were relaxed resulting in the abundance of cheap capital flowing to developing economies in Indonesia.

This time the condition is in reverse. Central banks from develop economies starting to tighten their monetary policies, draining capital for developing economies and raising the cost of borrowings.

Given that tax relies heavily on economic activities, which in turn depends on the flow of capital. The government’s goal to aim for a significant increase in tax revenue without a marked improvement in economic activity might raise concerns rather than applause.

TIS Intelligence Team contributed to this article, Email: linda.silaen@theinsiderstories.com

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The Insider Stories Founder Linda Silaen has a solid, proven history, established over more than a decade as a journalist with a leading internasional news organization, of being the first with the biggest economic news stories in Indonesia. Specializing in corporate news, Linda is also a veteran of some of the biggest macroeconomic and general news stories as Indonesia rapidly transforms into a major market economy. One of the founders of the original blog from which this company developed, Linda’s knowledge of investors’ information communications and data us developed from unrivaled networking skills that make her a well-known name among CEOs, bankers, government officials and private equity investors both in Indonesia and other countries.

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