The latest report on budget absorption released by the Ministry of Finance shows that in quarter II, January-June 2014, expenditure on fuel subsidies reached a staggering IDR 100.7 trillion (43.9% of the 2014 revised state budget allocation ceiling), and a drastic increase from IDR 20.0 trillion which was level of expenditure registered during the same period in quarter I-2014. Besides, the government and the national assembly reached an agreement that reduced the volume of subsidized fuel from 48 million kiloliters to 46 million kiloliters. Consequently, the government faces the risk of dealing with limited fiscal capacity to undertake development programs. Doubtless, unless there is change in fuel subsidies there is little doubt that the level of fuel subsidies will not be sufficient until the end of the year.
The decline in economic growth has had adverse impact on tax revenues. Indonesian economic growth was 5.12% (y-o-y) in quarter II-2014, which is lower than the assumption of 5.5% that underpinned the revised annual budget for 2014. Consequently, tax revenues declined as well.
Table 1: Domestic Tax Revenues, 2013-2014 (IDR billion)
Tax Revenue Target based on approved revised state budget 2014 registered a decline
Source: Ministry of Finance (2014)
Tax revenues declined by IDR 34.3 billion from the target set in 2014 state budget. Domestic tax revenues target in 2014 budget of IDR 1,226.2 billion was revised downwards to IDR 1,189.6 billion. The downward revision of the target of tax revenues was necessitated by the fact that target set for tax revenues for 2013 was not achieved, which had the implication that the basis of the calculation of the tax revenue target for 2014 was even lower than that set for the previous year. On the other hand, the decline in economic growth, coupled with sluggish export performance, also contributed to the drop in tax revenues on commodity export companies.
The percentage of revised state budget absorption as per July, in quarter II-2014 was lower than the level achieved in the same period under revised annual budget for 2013. In quarter II, July 2014, government expenditure was merely 47.3%, which is lower than 48.6% during the same period in 2013. Nonetheless, in nominal terms, budget realized budget expenditure in 2014 is higher than the level achieved at the same time in the previous year. Meanwhile, realized revenues in quarter II-2014 is higher than the level achieved in the same period in the revised annual budget 2013. State budget revenues was 50.2% of the target for revised annual budget 2014, which is higher than 49.5% achieved during the same period in state budget 2013. To that end, there is an improvement in the government revenues in 2014 compared with the performance in the previous year.
Government expenditure in 2014 experienced a reduction of IDR 43 trillion. The above condition has not contributed to spurring economic growth. While the target of government expenditure had been set at IDR 100 trillion, cutbacks in expenditures in ministries and non-ministries agencies were just IDR 43 trillion. The reduction in government expenditure was largely made on the procurement of goods but make as little cutbacks in expenditures of capital goods as possible. Based on the circular issued by the Ministry of Finance No. S-3347/MK.02/2014 on details of changes in expenditures in ministries and agencies in 2014 annual budget, reduced budget allowance for the Coordinating Ministry of Social Welfare from IDR 218.3 billion to IDR 194.3 billion or less than IDR 24 billion. Moreover, the 2014 budget allocation earmarked for the Coordinating Ministry for Political, Legal, and Security Affairs which had initially been set at IDR 514.3 billion was chopped by IDR 66 billion to IDR 448.3 billion, while budget allocation for the Coordinating Ministry for Economic Affairs, which had initially been set at IDR 324.9 billion experienced a reduction of IDR 33.6 billion to IDR 291.26 billion.
Table 2: Realized Budget Expenditure 2014, July 2013:Q2 – July 2014:Q2
The percentage of realized budget expenditure in revised state budget 2014:Q2 declined, but realized budget revenues posted an increase in the same period
Source: Ministry of Finance, I-account (2014, analyzed)
Some of the macroeconomic assumptions of Indonesian economy that underpinned the 2014 revised state budget have changed. On 18 June 2014, the revised budget for 2014 was approved, along with change in macroeconomic assumptions. The assumption of the exchange rate was raised to IDR 11,600 from initially IDR 10,500. Depreciation of the exchange rate has the potential to contribute to higher government expenditure on government subsidies on electricity and fuels.
Table 3: Comparison of Macroeconomic assumptions in state budget 2014, revised budget 2014, and state budget plan 2015
The economy which shows signs of instability has the potential to influence the realization of macroeconomic assumptions set in state budget plan 2015
Source: Ministry of Finance (2014)
The government has submitted the draft of the state budget plan for 2015, and deliberations are already underway in the national assembly. Government revenues in the state budget plan 2015, are estimated to reach IDR 1,762.3 trillion, while government expenditures are estimated to hover around IDR 2,019.9 trillion. To that end, the state budget plan for 2015 is expected to post a deficit of IDR 257.3 trillion, which is 2.32% of GDP. Meanwhile, the level of subsidies on energy is set at IDR 363 trillion, which leaves the government with very limited fiscal space. Viewed from standpoint of prevailing economic conditions, some of the macro assumptions in the state budget plan, 2015, are overly optimistic. Besides, such limited fiscal space will hamper efforts of the new government to allocate funds toward areas it considers to be priorities in realizing pledges made during campaigns.
Table 4: Budget Deficit in revised state budget 2014 and state budget plan 2015 (IDR Trillion)
Budget deficit in state budget plan 2015, is set at 2.32%
Source: Financial Note on the Draft Budget (2014)
In 2015 the government must work very hard if it is to fiscal space that is needed to obtain requisite funding to realize its vision and mission. The state budget plan 2015, sets the budget deficit at IDR 257.4 trillion (2.32% of GDP), which is higher than the level set in revised budget, 2014 of IDR 241.3 trillion (2.4% of GDP). Government expenditure estimates registered an increase from IDR 1,635.5 trillion in revised budget 2014 to IDR 1,762.3 trillion in the draft budget, 2015. Nonetheless, the current government has budgeted for all expenditure slots. Moreover, central government expenditure was 7.8% of revised state budget 2014. Such conditions will, no doubt, will complicate efforts of the new government to finance programs and projects that are required to realize its vision and mission. Thus, there is need to control over sources of government revenue and expenditure including subsidies on energy which constitute 18% of government expenditure.