Finance Minister Sri Mulyani Indrawati holds a press briefing on July 1, 2022 regarding the voluntary disclosure program, dubbed the second tax amnesty. - Jakarta Post/ANN
JAKARTA, July 4 (Jakarta Post/ANN): The Indonesian Finance Ministry is confident that the state budget deficit will drop below 4 per cent of gross domestic product (GDP) this year, pointing to faster-than-planned fiscal consolidation despite increased spending to shield Indonesians from surging global energy prices.
After a second downward revision, the ministry now expects the difference between state revenue and spending to reach just 3.92 per cent of GDP, much lower than its previous projection of 4.5 per cent as well as the budget plan’s original assumption of 4.85 per cent.
The latest figure allows the government to cut bond issuance to Rp 757.6 trillion (US$50.56 billion), a fifth of the amount stated in the initial budget plan for this year.
“The much lower deficit shows that our state budget is healthier [due to] our strategy for dealing with volatile conditions, especially in the financial sector, with global inflation and rising interest rates,” Finance Minister Sri Mulyani Indrawati told lawmakers in a meeting with the House of Representatives Budget Commission.
Shortly after gaining some breathing space from the pandemic, the world economy is facing yet another hurdle as inflation rises at a pace rarely seen in history, with pent-up demand and wide-scale supply disruption causing commodities prices from energy to food to skyrocket.
Led by the United States Federal Reserve, central banks around the world have raised their interest rates at a speed also not seen in decades, raising concerns about some countries’ ability to service debt.
To evolve with developments in the global situation, the government issued on June 27 Presidential Regulation No. 98/2022, which amended this year’s budget plan with increased spending and revenue.
The regulation raised the state revenue target up 13 percent to Rp 2.26 quadrillion, while it raised spending 12 percent to Rp 3.10 quadrillion.
Meanwhile, the ministry’s latest estimates suggest that actual revenue could reach Rp 2.43 quadrillion, or 7.5 percent higher than the revised target in the regulation, which could mean an even lower deficit.
Tax revenue, including income from customs and excise, is expected to reach Rp 1.92 quadrillion, while nontax revenue is projected to reach Rp 510.9 billion. These figures exceed last year’s achieved income by 24 and 11 percent, respectively.
The significant growth in revenue was largely due to surging commodity prices and recovery in tax collection across all sectors as the domestic economy rebounded, Sri Mulyani said.
In the first half of the year, she added state revenue jumped nearly 50 percent from the same period last year.
On the expenditure side, Sri Mulyani explained that the increase was largely the result of higher spending on energy subsidies and energy compensation, the latter paid to state-owned oil and gas giant Pertamina and state-owned electricity firm PLN.
The rise in spending was necessary to keep fuel and electricity affordable despite the global surge in energy prices, she underlined. “This was all done as a cushion to protect the people against [external] shocks,” Sri Mulyani said.
Earlier this year, the government raised its budget allocation for energy subsidy and compensation to Rp 520 trillion, up from originally Rp 152.5 trillion. Sri Mulyani said in May that the increase consumed most of the country’s windfall revenue and prompted spending cuts in some areas.
Bank Permata chief economist Josua Pardede told The Jakarta Post on Friday that the stronger revenue would greatly help the government with pushing the budget deficit back down below 3 percent of GDP next year.
Restoring the 3 percent budget cap in 2023 is mandated in the 2020 law on the COVID-19 pandemic, which allowed the government to exceed the usual cap in 2020-2022.
However, Josua cautioned the government to be mindful of the eventual normalization of commodity prices, which would greatly affect state revenue.
“For now, high commodity prices are benefiting us. Will that repeat next year? Not necessarily. Therefore, we must remain vigilant,” he said.
He added that other risks also loomed, such as the Fed rate hike, which would increase government spending on interest payments, as well as potentially new variants of Covid-19 that could cause reduced revenue.
Many have lauded the government’s decision to increase subsidy spending to keep the economy relatively insulated from global uncertainty.
However, the World Bank said in its Indonesia Economic Prospects for June 2022 that middle- to high-income families were benefiting most from government subsidies, and that the policy had been less effective in helping the poor.
The fund suggested that the government save around 1 percent of GDP by not hiking subsidies and instead spending more on targeted social assistance for low-income families, which would still allow for around 0.6 percent of GDP in fiscal savings. - Jakarta Post/ANN
