JUST how important will Indonesian government spending in the 2012 budget be in influencing the growth and general direction of the economy? Somewhat surprisingly, the answer is that no one really knows. What is almost certain, however, is that the official projection will be off target.
In recent years, the government has regularly failed to meet its spending plans. Last year, for example, only 1,042.12 trillion rupiah (S$140 billion) of the targeted 1,126.2 trillion rupiah was actually spent. As a result, macroeconomic projections using official figures to construct ratios such as fiscal deficit to gross domestic product (GDP) can be very misleading. As a result, government announcements about spending plans need to be treated with caution.
In his annual State of the Nation speech on Aug 16, President Susilo Bambang Yudhoyono announced that the government would spend significantly more money next year building railways, airports, seaports, roads, bridges and dams.
In theory, the projected 20 per cent increase in capital spending to 168.1 trillion rupiah should be welcomed. After all, it is widely acknowledged that the nation’s inadequate infrastructure is one of the most important barriers to investment and economic expansion. The projected budget deficit – equal to about 1.2 per cent of GDP – also sounds reasonable in macroeconomic terms.
In practice, however, much of the planned spending is unlikely to be realised. And matters appear to be getting worse. Tellingly, only about 10 per cent of the total capital expenditures budgeted for 2011 was implemented during the first half of this year.
The only categories of government spending that can reasonably be relied upon to be fully taken up are civil servant salaries and populist programmes such as fuel and electricity subsidies. A total of 208.9 trillion rupiah has been allocated for the latter in 2012.
After her appointment as coordinating minister for the economy in 2008, Dr Sri Mulyani Indrawati appeared to have made a determined effort to step up the implementation of government spending programmes. This is indicated by Bank Indonesia figures showing that the amount of excess money held each month by the government with the central bank during her tenure declined. After Dr Sri Mulyani resigned in mid-2010 to take up a position at the World Bank, however, the same old pattern prevailed.
The reason for government under-spending is unclear. One oft-cited factor is President Yudhoyono’s anti-corruption campaign, which has reportedly left officials fearful of being implicated in graft cases. Another factor may be bureaucratic inertia, and the tendency of Cabinet ministers to focus on jockeying for influence in the coalition government rather than implementing government programmes.
Requesting anonymity, one prominent economist I spoke to in Jakarta earlier this month suggested yet another possibility. Senior officials in the finance ministry, he argued, appeared to believe that the more cash the government has in hand the better, particularly during a time of global financial upheaval.
The caution hardly seems necessary. Indonesian banks are in good shape, and Indonesia’s export to GDP ratio of just 21 per cent does not suggest any particular vulnerability to the global crisis.
The reality is that by continuing to underspend, the government is in danger of implementing fiscal tightening at a time when inflation is largely under control and domestic consumption remains the main engine of growth. It also places the government in the invidious position of raising (and paying interest on) bonds to cover projected deficits that never materialise.
This is one reason why some in government now advocate using the unintended budget surpluses of previous years to finance part of this year’s projected deficit. It sounds like a good idea, presuming the president can get Parliament to agree.
But it doesn’t solve the fundamental problem. As Purbaya Yudhi Sadewa of Danareksa Securities in Jakarta points out, underspending is “abnormal government behaviour” that needs to be corrected.
Recently, many regulations have been simplified in an attempt to expedite government expenditure. The 2012 budget also makes a point of penalising two of the ministries that failed to spend their budgets last year by reducing their allocations.
However, the regulatory changes have yet to have much impact, and the token budget cuts endured by the worst offending ministries show little sense of urgency. The protracted debate over the land acquisition Bill, designed to expedite land purchases for badly needed infrastructure projects, reveals a similar attitude among parliamentarians.
All this suggests that observers who take the 2012 budget as indicating that capital spending will become a key driver of growth next year had better take another look. As with many other aspects of Indonesian society, things are not always what they seem.
Copyright © 2011 Singapore Press Holdings Ltd