State Budget and 2019 Challenges

ANTARA FOTO/AKBAR NUGROHO GUMAY

Finance Minister Sri Mulyani speaks at a press conference on the 2019 state budget on Wednesday (31/10/2018). State income in the budget has been set at Rp 2.16 quadrillion, while state expenditures at Rp 2.46 quadrillion.

The 2019 state budget was finally approved on Wednesday (31/10/2018). The Finance Minister Sri Mulyani said that the budget reflects optimism as well as circumspection amid the global uncertainty.

Generally, economists consider the budget’s macroeconomic assumption to be realistic and credible. Economic growth is set at 5.3 percent, inflation 3.5 percent, the rupiah’s exchange rate against the US dollar at Rp 15,000, Indonesian Crude Price (ICP) at US$70 per barrel and oil production at 775,000 barrels per day. State income is Rp 2,165.1 trillion and state expenditure is Rp 2,461.1 trillion for a budget deficit of Rp 296 trillion, or 1.84 percent of GDP.

As President Joko Widodo promised, the 2019 state budget is different from the previous year’s budget, which focused on infrastructure development, and focuses on developing human resources through a Rp 385 trillion budget allocation for programs that strengthen social protection.

On the one hand we see prudence, but on the other is a dilemma government faces. The highly conservative 2019 targets for fiscal deficit and debt payments show that the government is continuing in its efforts to improve debt management, self-reliance and state budget health while at the same time responding to criticisms on the rising debt ratio and burden.

However, some economists believe that the fiscal space is not wide enough to face major challenges in 2019, challenges concerning the global uncertainty and the political (election) year. Both challenges actually demand a solution from the government to encourage the economy, specifically to boost domestic consumption – aside from investment – as an engine critical to driving growth at a time when it is difficult to increase exports. Debt financing in the 2019 state budget is the lowest in the last five years. The targeted 15.4 percent increase in tax revenues also forces the taxation directorate general to work much harder and more innovatively amid a sluggish economy.

The profile of the 2019 state budget is not too populist, even with the upcoming political year. This is reflected in the absence of massive additions to subsidies and the social assistance budget. Instead, the subsidy budget has been cut. The other thing is that a large allocation for infrastructure spending is maintained, even amid the pressure to reduce state expenditures, especially in terms of foreign exchange.

Amid the non-conducive global, boosting the domestic economy by encouraging demand and improving the investment climate are a necessity. Optimism over the economic impacts of the political year still depends on the extent to which political spending raises domestic demand. We have to anticipate the possibility that investors and businesspeople will take a “wait and see” stance during the political year.

Our challenge is how to use the state budget, which contributes only 15 percent of GDP, as an effective fiscal instrument in providing incentives and stimuli for overall growth. Improving the efficiency and effectiveness of state expenditures is growing in importance. Aside from an allocation to the production sector to boost growth and expand the capacity of the national economy, the state budget should also be an instrument for equitable development. The active role of regional governments must be encouraged through continuous improvements to the fund transfer system.

An important agenda for the government is to continue with several breakthroughs in 2019 to narrow the current account deficit while continuing to implement its structural reform policies. The major challenge is in maintaining coordination and harmonization of the fiscal, monetary and financial policies and real sector policies.