Indonesia’s 2021 state budget draft: What we know so far

20-Aug-2020 Intellasia | Thejakartapost | 6:02 AM Print This Post

President Joko “Jokowi” Widodo has revealed Indonesia’s 2021 state budget proposal after delivering his state of the nation address before the People’s Consultative Assembly on Friday.

The government aims to use the state budget to accelerate the economic recovery after the pandemic and to push for structural reform in a bid to boost productivity, innovation and economic competitiveness.

“We must turn this crisis into an opportunity to make big leaps,” Jokowi said.

“Twenty-five years from now, at the centenary of the Republic of Indonesia, we must achieve great progress and make Indonesia a developed country,” stressed the President, who said the current health crisis was similar to a computer crash that required restarting and rebooting.

The COVID-19 pandemic has battered Indonesia’s economy, pushing the country’s economy into a contraction in the second quarter, the first since 1999, as the outbreak disrupted business activity and hurt consumer spending.

Next year, Indonesia looks to raise Rp 1.78 quadrillion (US$120.42 billion) in state income to fund bigger spending on infrastructure and health care, among other things, as the government proposes Rp 2.74 quadrillion in expenditure to fuel the virus-battered economy.

The projected state income is 4.5 percent higher than that stated in this year’s revised state budget, finance ministry data show, while expenditure is set to grows only slightly, namely by 0.3 percent.

On that basis, next year’s state budget deficit would reach Rp 971.2 trillion or 5.5 percent of the gross domestic product (GDP), lower than the estimated 6.34 percent of GDP this year, as the government looks to continue its stimulus spending into next year to support the recovery.

The state budget proposal will be deliberated with the House of Representatives before lawmakers pass it into law later this year.

‘Growth target proposal to boost optimism’

The government projects GDP growth of 4.5 percent to 5.5 percent next year, which compares to expected full-year growth of between minus 1.1 percent and plus 0.2 percent this year, according to a new estimate stated by Finance minister Sri Mulyani Indrawati on Friday.

With that assessment, the government has again revised down its economic projection for this year from its earlier expectation of a 0.4 percent contraction at worst or 1 percent growth at best.

This follows weaker-than-expected economic activity in the second quarter. Indonesia’s economy shrank 5.32 percent in the second quarter, the first decline in more than two decades, as movement restrictions to contain the coronavirus took a great toll on the economy.

The government plans to spend as much as Rp 1.4 quadrillion in the second half of the year to boost the economy, the Finance minister said recently.

“The government has to propose a growth assumption that can make us optimistic,” said Bank Central Asia (BCA) economist David Sumual on Friday. “However, [actual growth] will probably be 3 percent to 5 percent, as consumer spending remains subdued and foreign direct investment as well as portfolio investment have yet to flow in heavily.”

He stressed the need for the government to allocate the right dosage of stimulus into productive sectors next year.

“There are several sectors that will be like sinkholes if we give them too much stimulus funding while the COVID-19 pandemic has yet to end,” he warned. “It will be difficult [to see a positive result] if our tax money enters into bad sectors, such as tourism, aviation and transportation.”

Bank Permata economist Josua Pardede expressed a similar view, saying the government’s optimistic macroeconomic assumption for next year was still surrounded by uncertainty with regard to the virus.

“The key is how successful Indonesia’s and the global COVID-19 containment efforts are, so that people’s confidence and spending can improve.”

Higher tax collection

The government expects to collect Rp 1.48 quadrillion in revenue next year, namely tax income of Rp 1.27 quadrillion and customs and excise revenue of Rp 213.4 trillion. Tax revenue is expected to grow 5.5 percent from the figure stated in this year’s revised state budget.

Tax collection next year is expected to support the economic recovery as the tax office will provide selected and targeted tax incentives, improve its human resources and hopes to strengthen strategic sectors to support economic transformation.

The tax office will introduce new policies next year, such as charging tax on e-commerce, intensifying tax surveillance and extending the individual and regional tax basis, continuing tax reform and customs facility development and harmonising fiscal incentives across ministries and institutions.

This year, the government implemented a policy to appoint technology giants that have a significant presence in Indonesia to be value added tax (VAT) collectors amid plunging tax collection due to virus-battered economic activity. This year’s tax revenue is expected to be 9.2 percent below last year’s.

Priority programmes to be continued

The government is looking to spend a total of Rp 2.74 quadrillion, Rp 1.95 quadrillion of which is to be allocated to the central government, while Rp 796.3 trillion is earmarked for regional transfers and village funds.

“The overall state expenditure policies are expected to support the achievement of development targets in 2021,” said Jokowi.

The government has allocated Rp 169.7 trillion for health care, including to procure coronavirus vaccines and to strengthen disease prevention, among other things, while the education budget remains at 20 percent of the state budget of Rp 549.5 trillion for vocational and preemployment cards, among other programmes.

It will also allocate Rp 414 trillion to develop the country’s infrastructure, including basic necessities such as clean water and housing, as well as to provide Rp 30.5 trillion to develop information and communication technology (ICT) infrastructure), a new budget allocation.

Meanwhile, Rp 419.3 trillion is allocated to the government’s ongoing social protection programmes, including the family hope programme and cash assistance and another Rp 104.2 trillion for food security.

The government is also looking to revive the hard-hit tourism sector by allocating Rp 14.4 trillion to develop five priority destinations, namely Lake Toba in North Sumatra, Borobudur in Central Java, Mandalika in West Nusa Tenggara, Labuan Bajo in East Nusa Tenggara and Likupang in North Sulawesi.

In an effort to continue the national economic recovery programme implemented this year, the government has set aside Rp 356.5 trillion in stimulus spending next year, lower than the Rp 695.2 trillion allocated for this year.

The aggressive targeted increase in infrastructure spending implies that the GDP pendulum is likely to swing from consumption to investment in 2021, according to Bahana Sekuritas economist Satria Sambijantoro.

“This means infrastructure projects will be relied upon to accelerate economic recovery, likely due to the resilience in household spending and the already high-base of social assistance funds,” he went on to say.

Budget deficit

The government will continue to keep the budget deficit above the generally applicable legal limit of 3 percent next year, as it seeks to kick-start the sluggish economy. It plans to issue more sovereign debt papers (SBN), global bonds, retail bonds and sharia-compliant bonds to fund the deficit.

“We will always be opportunistic in finding the right moment and opportunity to issue SBN and sharia-compliant bonds,” Sri Mulyani said.

The government, she went on to say, would continue to work with Bank Indonesia (BI) and allow the central bank to buy government bonds directly at auction as a standby buyer. However, she ruled out the possibility of another debt monetisation scheme.

“The burden sharing scheme, which includes a private placement transaction, is a one-off policy only for this year,” she went on to say.

The central bank and the government have agreed on a Rp 574.59 trillion “burden-sharing” scheme, which sees BI buy government bonds worth at least Rp 397.5 trillion. The central bank will bear the debt cost and will return the yield it gains on the day the debt is paid.

The mounting government debt is expected to raise the country’s debt-to-GDP ratio from around 30 percent at the end of last year to around 40 percent by the end of next year, according to BCA’s David.

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Category: Indonesia

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