http://www.eastasiaforum.org/2012/09/15/the-2013-indonesian-state-budget-draft/
The 2013 Indonesian state budget draft September 15th, 2012 Author: Latif Adam, LIPI Indonesia’s 2013 state budget was initially expected to help boost economic growth by stimulating domestic consumption, investment and foreign trade but a review of the draft budget suggests that it is highly unlikely that this will be the case. Instead of providing strong bases for the economy to grow and develop sustainably, there are several indications that the budget has been designed with populist considerations in mind. The 2013 state budget draft will see revenue and grants increased by 11 per cent from the 2012 Revised State Budget figure. State expenditure for 2013 has been estimated at Rp1657.9 trillion (US$173 billion), an increase of 6.5 per cent from 2012. The 2013 budget deficit will reach Rp150.2 trillion (US$15.7 billion), equivalent to 1.62 per cent of Indonesia’s GDP. For example, the government proposes to sharply raise expenditure on Indonesia’s energy subsidy and on personnel. Indeed, the government wants to increase the energy subsidy by 35.7 per cent, from Rp202.4 trillion (US$21 billion) to Rp274.7 trillion (US$29 billion) in the 2013 budget draft. Personnel expenditure has also increased by 13.6 per cent between the 2012 Revised State Budget and the 2013 budget draft. In the 2013 budget draft, energy subsidy and personnel expenditure account for 45.3 per cent of total expenditure — an increase from 38.8 per cent in the 2012 Revised Budget. The increase in energy subsidy and personnel expenditure could be attributed to the government’s strategy to maintain the Indonesian population’s purchasing power amid the global economic crisis. It is by maintaining purchasing power that the government expects to reach its economic growth target of 6.8 per cent, utilising Indonesia’s massive domestic consumption. But efforts to increase civil servants’ salaries and subsidies, without efforts to address the root problems that often trigger higher inflation, will not effectively maintain the population’s purchasing power. Moreover, allocating huge spending on subsidies and personnel could threaten the country’s fiscal health. For the budget to effect positive change on the economy, the government should allocate higher capital expenditure — particularly on infrastructure spending — to promote the development of infrastructure. Improving infrastructure will facilitate the flow of goods and services, which in turn will help the government to manage the inflation rate, maintain the population’s purchasing power, and stimulate domestic consumption. Improving infrastructure in this way would also reduce the cost of doing business, so that Indonesia could attract more foreign direct investment. Similarly, the development of infrastructure will facilitate improving the competitiveness of Indonesia’s products in both domestic and international markets. Unfortunately infrastructure spending rose by only 7.7 per cent from the 2012 Revised Budget, to only Rp188.4 trillion (US$20 billion) in the 2013 state budget draft. Assuming that in 2013 the economy will grow by 6.8 per cent, Indonesia’s nominal GDP would reach Rp9270 trillion (US$970 billion). This means that the ratio of infrastructure spending to GDP in 2013 would only be 2.03 per cent, which is relatively stagnant compared to the ratio in 2012. This is also far below the ideal level of 5 per cent of GDP, and much lower than those in several Asian countries, such as Vietnam (10 per cent), China (9 per cent), and India (8 per cent). The 2013 state budget draft is also burdened by the amount of funds transferred to regions. Transfers of funds to the regions increased by 8.4 per cent from Rp478.8 trillion (US$50 billion) in the 2012 Revised Budget, to Rp518.9 trillion (US$54 billion) in the 2013 state budget draft. And yet there is an indication that these increased transfers will not significantly affect regional economic development. This is because, like the national budget, a large proportion of regional budgets also allocate for routine expenditure, particularly personnel expenditure. For example, the majority of local governments spent more than 50 per cent of their previous budget on personnel, while capital expenditure was always less than 10 per cent. The central government’s intention to amend Law No. 32 and 33/2004 deserves attention. Revising these two Acts opens the door for the government to regulate and set a maximum personnel expenditure of 50 per cent and capital expenditure of at least 20 per cent of total regional government expenditure. But before revising these two laws, the central government should also change its 2013 state budget draft to increase the allocation for capital expenditure from 17 per cent to closer to 20 per cent, at Rp227.8 trillion (US$24 billion). Without efforts from the central government to raise its capital expenditure to a level at or above 20 per cent, most regional governments will probably override the revision of these two laws. Latif Adam is an economist at the Research Center for Economics, Indonesian Institute of Sciences (LIPI), Jakarta. [Non-text portions of this message have been removed]
