Cash-strapped budget hits Indonesia

Bank Indonesia estimated that state revenue shortfalls could be greater than the government’s forecast and more budget cuts may need to be made.
“This is an uncomfortable discussion but it needs to be done.
“Indonesia, which has solid fundamentals, can be considered weak if our fiscal condition is not sufficiently strong.
“Foreign funds will easily exit and create a setback to our economy,” BI governor Agus Martowardojo told a meeting with the House of Representatives on Tuesday evening.
President Joko “Jokowi” Widodo has issued a presidential instruction to slash state spending by 137 trillion rupiah (Bt357 billion) due to a 219 trillion-rupiah revenue shortfall, as the government has admitted that it previously set the tax target too high.
Bank Indonesia estimated that the budget cut would slash economic growth by 0.1 percentage point this year to 4.9-5.3 per cent, in contrast to the government’s target of 5.2-per-cent growth.
Finance Minister Sri Mulyani Indrawati agreed with the central bank’s estimate, separately telling lawmakers on Wednesday, “this is an implication, however, to manage the state budget, I myself as a finance minister must run it by the state budget law”.
Sri Mulyani, who replaced finance minister Bambang Brodjonegoro in Jokowi’s second reshuffle in late July, convinced the president to again revise the state budget after spending grew faster than revenue, potentially leading to fund shortages for the government’s development programmes.
Apart from cutting ministries’ and state institutions’ spending, another option to keep the budget in check is to delay fund transfers to regional administrations.
Sri Mulyani estimated the deficit ending the year at 2.5 per cent, |versus previous estimates of 2.35 per cent and nearing the legal threshold of 3 per cent of gross domestic product.
Overall regional transfer and village funds worth 72.9 trillion rupiah would be delayed until next year, from the initial plan of 776.3 trillion rupiah, which would hit the general allocation fund (DAU) and revenue-sharing fund (DBH) hardest.
The DAU, which is primarily used for capital expenditure, would be cut by 19.4 trillion rupiah, while 16.7 rupiah per cent would be shaved off the DBH, which is allocated based on a region’s potential.
The remaining 36.8 trillion-rupiah cut would be sourced by slashing village funds, special allocation funds and tax revenue-sharing funds.
The regional transfer cut would surely affect local administrations because the funds are a vital revenue source for them outside locally generated income, said Kenta Institute senior economist Eric Sugandi.
“This (the funding cut) can encourage local governments to spend their idle funds,” Finance Ministry director-general for budgeting Askolani said.
The government had yet to learn if the cut would increase local budget deficits, he added.
A Finance Ministry regulation only allows the local budget deficit at most 0.3 per cent for this year’s state budget.
The central government needs to cover any potential regional budget deficit because it was the party that can seek loans or generate funds from the capital market through bond issuances, said Samuel Assets Management economist Lana Soelistianingsih.