State Budget: The Risk Increases, Fiscal Reform Need Consistency

Photo by Finance Ministry

JAKARTA (TheInsiderStories) – Indonesian Government decision to revise the 2017’s State Budget have a challenge from the revenues and spending side. Need a fiscal reform and consistency to reach all the major targets base on the current condition.

Based on the Revised State Budget for 2017, government will spend more aggressively to Rp2,133.3 trillion from initial planned Rp2,080,5 trillion. Around Rp206.6 trillion as a capital expenditure, rose Rp12.5 trillion from previous target Rp194.3 trillion.

On the revenues side, the Government lowering the target to Rp1,736.1 trillion from earlier Rp1,750.3 trillion. Based on the first half (1H) realization, government only spent Rp893.3 trillion or 41.8 percent of this year targets.

Contradiction with the capex realization, the Government only spent 22.8 percent of this year target worth of Rp47.5 trillion. Its mean, the government must spend Rp159.1 trillion in the 2H 2017 to stimulate the economy.

In this semester, Government expect to collect 97.9 percent of revenues target of Rp1,750.28 trillion. On the spending side, the Government projected to reach 99.8 percent of this year target. Consequently, deficit is projected to around 2.67 percent of GDP.

Based on the outlook, Indonesian Government revised the economic growth 5.2 percent from initial planned 5.1 percent boost by the government spending, as well as export, investment, and household consumption. In 2H, Government sees the economic growth to reach 5.3 percent while in 1H17, is projected to grow around 5.1 percent of gross domestic product (GDP).

So it is implying that 5.2 percent of GDP growth in full-year 2017 is still achievable. The inflation target is revised up at 4.3 percent, higher than previous target at 4.0 percent.

Thanks to House of Representative, the state budget fiscal deficit is widened from 2.41 percent to 2.92 percent to GDP. But the government said it sees the gap at 2.67 percent to GDP by year-end as not the entire allocated budget is typically spent. By law, the annual budget deficits cannot exceed 3 percent of GDP.

Finance Minister Sri Mulyani Indrawati said, the widening budget deficit target is a reflection that state budget has to accommodate urgent need for spending such as 2018 Asian Games and energy subsidy. But, she believe that spending will have good impact to the economy, including to maintain the people’s purchasing power.

The government also asks for additional energy subsidy of Rp24.22 trillion to ensure that there is no fuel hike in 2H17. However, house only accepts Rp12,6 trillion additional energy subsidy. It triggers some speculations that the government may increase fuel prices even though finance ministry has denied it later.

Chatib Basri, economist who is also former finance minister said the government move to increasing the subsidy is contrary with fiscal reform agenda. He said, the increasing of subsidy will affects state budget credibility whereas Indonesia has been awarded the investment grade status by global rating agency Standard & Poor’s (S&P) because fiscal stability.

Subsidy budget is expected to be a risk for revised state budget of 2017 due to the government’s proposed oil price assumption of US$ 50 per barrel is down by House to US$ 48 per barrel. The fluctuations in oil prices have the potential to increase in subsidies cost by the end of the year.

The increase of subsidies cost will have a direct effect on the balance of state-owned electricity PT Perusahaan Listrik Negara (PLN) (Persero) and state-owned oil and gas PT Pertamina (Persero). The government is currently have a debt to Pertamina of Rp38 trillion although the government guarantees they will pay its debts after the audit.

However, the risk from revenue side is decreasing in line with the decreased of the tax revenue target by Rp29.9 trillion or 2.4 percent from state budget 2017 target of Rp1,241.8 trillion. So that tax revenue growth target is 12.38 percent compared to tax revenue in 2016 by Rp1,105 trillion is seems more realistic than previous target.

Moreover, with excluding tax amnesty revenue, tax revenue growth in revised state budget is still high. But Sri Mulyani still optimist the potential tax shortfall in the end of the year is just Rp29.9 trillion or lower than previous estimation of Rp50 trillion.

“The tax authority has assessed the realization of tax revenue in 1H17 and identify the tax potential. They promise me to raise another Rp20 trillion in tax revenue,” she said.

Economist Raden Pardede view revised State Budget 2017 give confidence to the market because it more credible than state budgets in the last two years. The budget disbursement in 1H17 also better than last year so government spending give positive impact to GDP compared to contraction government spending in the last year due to budget cut.

“Given the more realistic figures, it is expected there will be no another adjustment and budget cuts,” Raden said.

The decreasing of state revenue target, he said, makes state budget more credible. Revised state budget 2017 will also force spending by ministries to be more efficient. Moreover, there will no longer “ijon” system so that management of state budget will better.

With the more credible state budget, the businessman will be more calm and not disrupted by possible budget cuts, or the application of the “ijon” system in taxes and excise. Uncertainty will diminish and confidence of investor can be recovered.

“The business world will be convinced to invest and expand, which in turn will move the economy. Similarly, foreign investors will be more confident about the sustainability of fiscal policy, so investment will enter from abroad,” he said.

Revised state budget 2017 is expected to become turning point in fiscal management. However, reforms of medium-term state budget are still needed. A sustainable framework of medium and long-term state budget is required and can then become a reference point for the annual state budget.

The risk from state budget 2017 is coming from the primary deficit which is the revenues have not yet been able to cover operational spending. In revised state budget 2017, primary deficit is expected between Rp144.3-Rp178 trillion.

Tax reforms and government revenues become key to increase the tax ratio as well as reform in government spending, especially social spending in health, education, and village fund. Refom in subsidies also crucial as a part of fiscal reform.

In 2018, the government has now submitted to the House a number of macro economic assumptions ranging from economic growth to oil prices. The government is expected to make more credible state budget. The revenue side need to be realistic and spending need more efficient and productive due to the increasing of spending allocation. (EV/YW/RF)