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In for austere budget

Publication Date : 14-08-2014

 

Finance Minister Chatib Basri of the outgoing government of President Susilo Bambang Yudhoyono confirmed on Tuesday that the draft 2015 state budget of Indonesia to be proposed to the House of Representatives (DPR) on Friday will feature mostly fixed routine expenditures (baseline budget) so as to provide the new government with leeway to design its strategic investment spending.

This will mean that the spending proposal for the 2015 fiscal year beginning in January will not touch what most analysts see as the fuel-subsidy time bomb. The problem, though, is that fiscal sustainability will be in danger, sovereign risks will increase and so will the government’s borrowing costs, if the new government does nothing about the runaway fuel subsidy.

It would have been much better if the House had two alternative scenarios to deliberate, instead of having to design from scratch a fiscally sustainable budget plan. After all, the House will have just two months for deliberations, as the budget plan has to be approved before the end of October to allow for regional administrations to design their respective budgets.

The 2015 state budget will be strategically important for the new government of president-elect Joko “Jokowi” Widodo because it has to be designed as the guidepost for the market (businesses) on how fiscal management will be within the medium-term development plan (2014-2019).

To gain market confidence, it is especially crucial that the budget plan should stipulate a time-bound, gradual phasing out of fuel subsidies within the next five years.

Investors will be jittery if the 2015 budget plan is expansive (much larger than this year’s US$156 billion) and filled with many populist programs for pump-priming because, at least for the next two years, the government’s fiscal policies should be tight in order to be economically sustainable.

A conservative budget will gain confidence from the business community, spurring new investment, as investors would feel comfortable that, despite the lingering uncertainty about the global economy, there would not likely be painful adjustments needed midway through the fiscal year.

Talking about medium-term growth means talking about policies that are familiar, such as education, infrastructure and bureaucratic reform. We need to abandon short-term fixes and radical solutions that could shock the market.

The mass media may hunger for novelty and drama. But when it comes to the economy, stability and legal certainty seems to be the safest route right now. It could still be politically challenging for the Jokowi government to have the 2015 state budget approved by the House because it will have to deal with what we foresee as a ‘toxic’ coalition of the opposition parties of the presidential loser Prabowo Subianto, which still controls over 60 per cent of House seats.

Considering Prabowo’s stubborn refusal to concede defeat, his coalition — if it remains united after the Constitutional Court confirms Jokowi’s victory later this month — will likely continue to politically “harass” the Jokowi administration within the policy-making arena at the House.

 

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