A more politically confident SBY to propose his 2010 budget plan

Vincent Lingga , THE JAKARTA POST , JAKARTA Fri, 07/31/2009 1:45 PM Headlines

There are at least two positive factors that will make the 2010 budget proposal President Susilo Bambang Yudhoyono will submit to the House of Representatives on Monday more politically and fiscally credible. His re-election for the 2009-2014 period will provide his budget plan with a stronger political certitude, different from the political situation when then president Megawati Soekarnoputri proposed the 2005 draft state budget in mid-August 2004, two months before the installation of President Yudhoyono's government.


The green shoots that have begun to sprout in some developed economies and the stabilizing global financial market certainly help the government draw more reliable macroeconomic assumptions for aggregate revenue and spending estimates.
Putting it briefly, the external factor for next year's budget implementation will not be as adverse as this year.


That is strikingly different from the turbulent period for the preparations of the current 2009 budget last August, when the global financial crisis peaked, forcing the government to amend the budget plan several times even before it began to be implemented in January.

Internally, the 4.4 percent economic growth in the first quarter, compared to deep contraction in most other countries, is a confidence-building block for the economy, especially investors.
Yet another positive factor is that the upcoming spending plan is designed by a politically more confident President who will run his second and last term with much less political debt to the various parties in parliament.


Despite all these positive developments, though, we cannot expect the 2010 budget to be significantly more expansive than the current one, because economic improvements around the world next year will be incremental at best.

The total spending will most likely remain in the neighborhood of US$100 billion.
Most analysts foresee the economy to expand within the range of 5 percent to 5.5 percent next year, up slightly from an estimated 4.5 percent this year, driven primarily by private and government consumption. Hence there will not be much space for pump priming, let alone for public-sector investment, because tax revenues will not be able to increase significantly amid the sluggish real sector of the economy and weak commodity prices.


Deficit spending may increase to as much as 2.5 percent of gross domestic product (GDP), but this will not provide any boost to economic activities if bureaucratic inertia and inadequate institutional capacity remain the biggest hurdle to budget disbursement as they are this year.

The fiscal policy must therefore take into account the need to ensure the timely flow of funds to programs and projects by removing differences in outlook between budget personnel and program and planning staff related to background, values and functions.


With all the severe limitations within the budget financing, the government should design its spending programs according to policy priorities of alleviating poverty and unemployment through programs targeted to micro-, small- and medium-scale businesses and others to reinvigorate labor-intensive manufacturing operations.
Given the persistently big debt-servicing burdens, the government will not be able to significantly increase appropriations for investment.


However, larger investment spending, notably for infrastructure, would still be possible should a more confident President Yudhoyono have the courage to reduce fuel and electricity subsidies, which have been the biggest barrier to energy efficiency and conservation in the country.

All in all, the 2010 budget will not be an expansive, nor pump-priming one.
But since the budget plan is a communication system, conveying signals about behavior, prices, priorities, intentions and commitments, it can still play a catalytic role for buoying the financial market and the investment climate.


A realistic budget and a prudent fiscal system will be able to reinvigorate the pace of private investment, the third engine of growth that has run very slowly over the past few years.
A budget system, however fiscally viable, is not self-contained as it is influenced by multiple, converging uncertainties, entrenched patterns of expenditure, inflation and structural imbalances between expectations and resources.


The 2010 budget must be designed to cope with these realities, while being aware of self-inflicted uncertainties or rigidities associated with oil prices and financial markets.