RECENT FINANCE & DEVELOPMENT REPORTSIndonesia: Parliament Passes 2007 Budget
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An exchange rate of 9,070 per USD is used throughout this report. Download
this document in PDF fi Parliament
completed work on the GOI’s 2007 budget on October 17. Table 1
outlines the major revenue, expenditure, and financing items in the
budget. The Ministry of Finance has not yet finalized detailed
spending allocations for individual programs. This report uses the
October 17 market exchange rate of Rp 9,155/USD Table 1:
FY 2007 and FY 2006 Budgets
(*)
Column totals may not add perfectly due to rounding Expenditure
Highlights ·
The GOI
significantly increased routine spending on personnel and material
expenditures. Personnel
spending will increase 24% in nominal terms over 2006 and includes a
15% increase in base salaries and retirement benefits for the civil
service, the military, and the police; an increase in teacher
allowances; and a 20% increase in official per diem for the police and
the army. ·
Fuel
and electricity subsidies, although smaller than in 2006, remain
significant at Rp 61.9 trillion ($6.8 billion) and Rp 25.8 trillion
($2.8 billion), respectively. The
high level of fuel subsidies continues to impede government spending
on capital investment. Capital
expenditures (formerly classified as development expenditures)
increase by only 11% in nominal terms over 2006 levels to Rp 76.9
trillion ($8.4 billion). ·
The GOI
will channel the bulk of 2007 social expenditures through line
ministries via several social assistance programs. These include
direct subsidies for education and health programs, funding for the
“national community building program”, and a Rp 2.8 trillion ($306
million) conditional cash subsidy program.
The conditional cash subsidy represents an extension of the Rp
15.6 trillion ($1.7 billion) cash subsidy program the GOI introduced
in 2006 to ameliorate the impact of the October 2005 fuel price hikes.
The social assistance line item also include a Rp 2 trillion ($
218 million) emergency reserve and disaster mitigation fund.
·
Other
expenditures drop by 56% compared to 2006, mainly due to the GOI’s
reclassification of the direct cash subsidy program. ·
Transfers
to regions increases by a nominal 17% over the previous year in the
2007 budget to Rp 258.8 trillion ($28.3 billion), or 7.3% of GDP. The increase includes a 10.4% increase in natural resources
revenue sharing funds (Revenue Sharing Fund or DBH) to Rp 68.5
trillion ($7.5 billion), and a 13% increase in the General Allocation
Fund (DAU) to Rp 164.8 trillion ($18 billion).
As in previous years, no region will receive less than last
year; however, 2007 will be the last year that the DAU will increase
consistently for all regions. Starting
2008, the GOI intends to share funds more equitably across regions,
requiring resource-rich regions to “transfer their surplus” to
under-resourced regions. ·
In line
with President Yudhoyono’s policy to increase spending on social
development, the Ministry of Education (MOE) receives the ministry
highest budget allocation at Rp 43.5 trillion ($ 4.7 billion), or 9%
of central government spending. Further,
the GOI has allocated an additional Rp 1.8 trillion ($197 million) for
nationwide education assistance programs, to be managed jointly by MOE
and Ministry of Religious Affairs.
The amount of funds allocated to the Ministry of Health
increases by 20% compared to the previous year, rising to Rp 17.1
trillion ($1.9 billion). The GOI allotted a portion of the increase to rural health
clinics and local hospitals. Table 2 lists the allocations for the ten agencies that receive the largest budgets 2007. The allocation for all major agencies increased, with the exception of the Aceh Rehabilitation and Reconstruction Agency (BRR). Table 2:
FY 2007 Budget Allocation By Ministries/Agencies (in
trillions of Rupiah)
(*)
Aceh Rehabilitation and Reconstruction Agency Revenue
and Financing Highlights ·
The
2007 budget projects a 10% nominal increase in revenue over 2006
levels to Rp 723.1 trillion ($79.0 billion).
The increase is predicated on higher tax receipts, which are
expected to increase by 20% in nominal terms to Rp 509.5 trillion
($55.6 billion) or 14% of 2007 GDP.
Tax revenue accounts for approximately 70% of total domestic
revenue in the 2007 budget. ·
On the
other hand, the GOI expects lower revenues from natural resource
sources, with natural resource tax and non-tax revenues falling from
Rp 198.5 trillion ($21.7 billion) in 2006 to Rp 181.1 trillion ($19.8)
in 2007. ·
The
projected 2007 budget deficit is Rp 40.5 trillion ($ 4.4 billion),
equivalent to 1.1% of GDP. Notably,
the 2007 projected deficit to GDP ratio is lower than in 2006, despite
calls for increased government spending to spur growth.
·
The GOI
will finance the deficit through a combination of domestic and foreign
bond issuance. The MOF
has not announced a financing plan for 2007, but in 2006 the GOI
financed a deficit of a similar magnitude with an approximately 50/50
mix of rupiah and dollar bonds. ·
The
budget also signals the resumption of a limited privatization program
with a Rp 3.3 trillion ($360 million) line item for gross
privatization proceeds, Rp 1.3 trillion ($ 142 million) of which is
netted out in the form of “capital injections” into several
state-owned enterprises. ·
For the
second year in a row, the budget also contains a Rp 2 trillion ($218
million) infrastructure funding line item.
The GOI plans to use these funds to establish a revolving fund
for land acquisition and a contingency fund to cover the cost of GOI
guarantees for infrastructure projects.
Table 3 provides
breakdowns on budget financing sources. Table 3:
FY 2007 Financing (in
trillions of Rupiah)
Mostly
Credible Budget Assumptions ·
The
macroeconomic assumptions underlying the budget are important because
they influence various revenue, spending, and financing items. For
example, if the GOI adjusts the assumed USD/Rp exchange rate upward,
the value of Indonesia’s USD oil exports calculated in rupiah rises,
while the rupiah value of Indonesia’s USD debt service also rises. ·
Most
observers regard the assumptions as credible, with the possible
exception of the projected 6.3% real GDP growth rate in 2007, which is
on the high side of many economists’ forecasts.
Table 4 outlines the
economic assumptions underlying the FY 2007 budget. Table 4:
FY 2007 Budget Assumptions
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