Indonesia's Finance Ministry curbs state spending

JAKARTA: The Finance Ministry has announced mandatory belt-tightening in government institutions but, at the same time, insists that budget execution is on course to meet the fiscal plan for this year.

In a press conference about the budget last Friday, Finance Minister Suahasil Nazara used the phrase “on-track” multiple times to describe the budget performance up until the end of September.

Be it the deficit, spending or revenue figures, the minister said the execution so far was “healthy”.

Nevertheless, Suahasil issued an “immediate and confidential” circular dated Oct 8 to government institutions that bars certain spending items in the fourth quarter, save for anything pertaining to “priority presidential directives”.

The letter instructs all ministries and agencies to shave 30% off work trip budgets and to postpone purchases of new motor vehicles, as well as the procurement or construction of new official residences or renovation of government buildings and offices.

Deputy Finance Minister Luky Alfirman said last Friday that the letter was intended for “improved spending” in the sense that “we want to ensure that spending is truly in keeping with the priorities we have set”, according to a report by CNBC Indonesia.

Suahasil did not address the circular in the press conference but revealed that total spending this year had reached 2.66 quadrillion rupiah (US$148.6bil) at the end of last month, or 69% of the 3.8 quadrillion rupiah target set in the budget plan.

That figure marks a 19% increase from last year’s spending in the same period, which Suahasil said was on account of “accelerated spending” to avoid piling up most of the expenditure at the end of the year, which was a common practice in Indonesian fiscal policy.

He also said that spending had gone up in general because the Middle East conflict had caused a surge in oil prices, leading to a spike in energy subsidy expenditure.

Energy subsidies and compensation of state-owned enterprises (SOEs) for selling energy below market prices have cost the state 376.8 trillion rupiah by the end of the third quarter, far exceeding the 244.6 trillion rupiah in realised spending in the same period last year.

Suahasil noted that the surge was also on account of the fact that the state now made the payouts to SOEs every month rather than mostly at the end of the year, as in the past.

In the meantime, state revenue has reached 2.34 quadrillion rupiah, or 74.2% of the annual target of 3.15 quadrillion rupiah.

Except for grants, all revenue items recorded year-on-year (y-o-y) growth, resulting in accumulated revenue growth of 25.5% y-o-y.

Tax revenue, which accounts for more than two thirds of total state revenue, was among the fastest-growing income sources at 24.1% y-o-y, partly due to last year’s particularly weak tax collection.

The budget deficit, which occurs when spending exceeds revenue, was recorded at just 319 trillion rupiah, or 1.24% of gross domestic product (GDP), by the end of September, still far off from the 2.68% GDP target set in this year’s budget, and even further away from the 2.85% projected mid-year.

Permata Bank chief economist Josua Pardede told The Jakarta Post last Friday that the budget performance so far was indeed on target, but noted that fiscal risks would increase in the fourth quarter.

“It’s true that the state budget is under control in terms of execution, but that doesn’t mean that the fiscal situation is entirely safe from additional pressure, especially if oil prices, interest rates and spending needs should increase together ahead of the year-end,” said Josua.

While the revenue and expenditure figures were on-track, he said the austerity order was meant to keep it that way, as the “anticipatory” measures were aimed at maintaining fiscal resilience amid growing risks.

However, Josua stressed that austerity should not be pursued for the sake of sprucing up the deficit figure.

“It should be done to improve efficiency without sacrificing the economic benefits” of government spending, according to Josua.

He argued that overly aggressive spending cuts could become counterproductive amid high economic pressure but deemed the policy overall positive, if done selectively, measurably and directed toward improving the quality of spending.

Rahma Gafmi, an economics professor at Airlangga University, told the Post last Friday that the spending limitation was likely intended to fix the fiscal image, which this year had been tainted before the eyes of investors.

“When the government consistently shows strict control over bureaucracy spending, this sends a positive signal that says Indonesia is managing its budget with high fiscal discipline,” said Rahma, who likewise viewed the maneuver positively overall. — The Jakarta Post/ANN