JAKARTA: The government has indicated that this year’s fiscal deficit may temporarily exceed the general legal limit for the sake of maintaining economic growth if oil prices remain high as war rages on in the Middle East.
President Prabowo Subianto said in a cabinet meeting last Friday that a “balanced budget is the most ideal”, stressing that he hoped the deficit would not exceed the cap set at 3% of gross domestic product.
The cap was put in place in 2003 to enforce disciplined fiscal policy following the experience of the Asian Financial Crisis of 1997-1998.
However, Prabowo said in an interview with Bloomberg the following day that the administration might allow for a short-term increase of the deficit cap should oil prices stay elevated for a prolonged period.
He said the cap was “a good tool to discipline ourselves” and that there was no plan to revise the 2003 law, “unless there’s a very big emergency like Covid”, before adding, “but I hope that we need not change it”.
“We must live within our means”, the president said in the interview. “Do not spend more than you earn.”
The war in the Middle East has pushed up the Brent crude oil price to US$103 per barrel last Friday from around US$70 per barrel before the first missile was fired on Feb 28.
The recent oil price has been sustained at a far higher level than the US$70 a barrel assumption set in the budget plan.
Should the actual oil price exceed the assumed level for the full year, the budget allocated for fuel subsidy would fall short.
This would leave the government with three options, the first being to pass the burden on to consumers by setting higher prices for subsidised fuels.
Prabowo said he was confident the government could avoid raising fuel prices but it would become “very difficult” should oil prices exceeded US$120 per barrel for a sustained period.
In the cabinet meeting, he said the game plan for now was to curb fuel consumption.
The government is weighing policies Pakistan has undertaken in response to the skyrocketing oil price, such as a mandatory work-from-home arrangement, a four-day work week and turning university classes online.
The second option is to increase the subsidy allocation in the budget by issuing more government debt, which would push up the deficit that was already standing at 0.53% of gross domestic product (GDP) just two months into the year.
In the cabinet meeting, Coordinating Economy Minister Airlangga Hartarto revealed scenarios based on an oil price averaging between US$90 and US$115 per barrel and the rupiah trading at 17,000 to 17,500 rupiah per US dollar.
In the best-case scenario, the year would end with a deficit at 3.18% of GDP, while in the higher oil price and weaker rupiah scenarios, the shortfall was projected to reach 3.53% of GDP.
In the worst-case scenario, the deficit might rise to 4.06% of GDP. Airlangga’s scenarios were calculated under the assumption that the government refrained from spending cuts for the sake of reaching GDP growth between 5.2% and 5.3%.
The budget plan stipulates a target of 5.4% for GDP growth. “With these conceivable scenarios, a deficit of 3% is hard to maintain, unless we want to cut spending and therefore cut growth, Pak President,” Airlangga said before Prabowo and the entire cabinet.
The third option is for the government to cut state spending elsewhere to free up enough money for a higher subsidy allocation, but that, as Airlangga suggested, might come at the expense of GDP growth.
Prabowo said the government would root out inefficient spending that might involve foul play of “administrative manipulation” causing “big leakages”.
He said the cabinet was also considering pay cuts for high officials, limiting the availability of subsidised fuel and reducing the use of vehicles for state functions. — The Jakarta Post/ANN
