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Indonesia GOVERNMENT FINANCE
Central Government Budget
In addition to regulating many aspects of economic
activity,
the government plays a direct role in the economy through
its
implementation of the central government budget. Early
each year,
the president presents to the House of People's
Representatives
(DPR) the proposed annual budget prepared by the
Department of
Finance for the upcoming fiscal year
(see Legislative Bodies
, ch.
4). Total government expenditures, including both routine
expenditures and development projects, averaged about 22
percent of
GDP during the 1980s (see
table 16;
table 17, Appendix).
The broad
outlines of government spending were framed in five-year
plans
prepared by Bappenas. The five-year development plan, or
Repelita (see Glossary),
described overall economic objectives,
including
the desired growth rates to be achieved in major economic
sectors
such as agriculture, mining, and industry, and more
detailed
proposals for selected activities that were of particular
concern
during the planning period. Repelita V (fiscal years 1989
to 1993;
fiscal year--FY--see Glossary),
emphasized the objective
of
continued export diversification and the reduction of
foreign aid
and foreign borrowing as sources of government revenue.
However,
the annual central government budget provided a more
concrete set
of priorities than the broad Repelita guidelines and
allowed for
adjustments in total spending to meet unforeseen changes
in
revenue.
Government finance in developing countries is often
constrained
by the ability to collect taxes; tax collection in these
countries
is often hindered by the lack of accounting information on
many
informal businesses, the difficulty in imposing income tax
withholdings among the millions of self-employed in
agriculture and
services, and extensive corruption. Indonesia was no
exception to
this rule, but during the 1970s the government was able to
compensate for the limited domestic tax base by relying on
taxes
from the formal corporate sector, especially from foreign
oil and
gas operations. From 1979 to 1983, tax revenues from the
oil and
gas sector accounted for about 56 percent of total
government
revenues. Unfortunately, this bountiful resource
undermined efforts
to address serious problems in domestic tax laws and
collection
efforts (see
table 18, Appendix).
The prospect of declining oil sector taxes because of
the oil
market collapse in the mid-1980s, together with a growing
recognition of the flaws in domestic tax laws, motivated a
comprehensive tax reform in 1984. The cornerstone of the
1984 tax
reform was a simple
value-added tax (see Glossary) to be
levied on
domestic manufacturing and imports to replace the previous
sales
tax that encompassed eight different tax rates and many
types of
exemptions. The new value-added sales tax applied a
uniform tax
rate to all manufacturing firms and importers; the rate
was
initially set at 10 percent but the tax law permitted the
rate to
be altered within the range of 5 to 15 percent if revenue
needs
were to change. The tax was not applied to basic staples
such as
unprocessed foods, and so did not rely heavily on taxing
poorer
income groups who spent a large share of their income on
such
nonmanufactured products. The tax reform included a new
income tax
that imposed a three-tier rate of 14, 25, and 35 percent
on both
business and personal income. However, around 85 percent
of
households fell below the minimum income subject to tax,
equivalent
to US$3,000 in 1984.
The government also maintained its commitment to a
balanced
central government budget in part by counting foreign
borrowing and
foreign aid as part of government revenues, labeled as
development
funds. During Repelita III (FY 1979-83), development funds
accounted for about 15 percent of total government
revenues and for
about 30 percent of total development expenditures. When
oil tax
revenues declined by 15 percent per year when controlled
for
inflation from 1984 to 1986, the government responded by
both
curtailing expenditures and increasing the reliance on
foreign
borrowing.
During this adjustment period, total government
expenditures
did not increase, compared with an average annual increase
of 9
percent during Repelita III, but development funds
continued to
grow at 10 percent per year. In the late 1980s, the
effects of the
tax reform began to be felt, and a combination of
increased
domestic non-oil tax revenues, the restoration of oil tax
revenue
growth as the oil market slowly improved, and continued
growth in
foreign borrowing permitted the restoration of a 10
percent annual
growth in government expenditures from 1987 to 1990.
The structure of the government budget was greatly
altered by
these adjustments. During Repelita IV (FY 1984-88),
non-oil
domestic tax revenues accounted for 38 percent of total
revenue,
compared with 28 percent in Repelita III. However,
development
funds came to account for 57 percent of development
expenditures.
This increasing reliance on foreign funds contributed to a
sharp
rise in government debt service obligations, which rose to
account
for 24 percent of government expenditures, compared with
about 9
percent under Repelita III. The budgetary concerns of the
1990s
reflected these dramatic developments.
The proposed budget for FY 1992 highlighted the
government's
efforts to manage the foreign debt and to increase
reliance on nonoil domestic tax revenues. Overall, government
expenditures were
not expected to increase when adjusted for the anticipated
inflation of about 10 percent. The value-added tax on
manufacturing
activity was to be extended to apply to retailers with
annual
turnover of more than Rp1 billion. The interest earnings
on bank
deposits owned by corporations was to be taxed as normal
income at
a higher rate than the previous 15 percent tax on interest
earnings
introduced in 1988, and luxury taxes on some items would
be
increased. While development expenditure was to increase
somewhat,
the increase was to be funded entirely by the anticipated
higher
domestic tax revenues.
These specific measures embodied in the FY 1992 budget
reflect
the continued effort to meet the Repelita V guidelines.
Repelita V
predicted a decline in the nation's debt service ratio
(total debt
service as a percent of merchandise export earnings) from
the 35
percent level prevailing in 1989 to 25 percent by 1994.
This was to
be achieved both by the decline in government foreign debt
and by
a decline in foreign funds to finance private sector
investment.
Overall, Repelita V targeted almost 94 percent of total
investment
to be funded by domestic sources, compared with 81 percent
in the
previous plan. The plan's overall level of investment
remained the
same, about 26 percent of GDP, as in Repelita IV. Repelita
V also
targeted inflation-adjusted GDP growth at 5 percent per
year; the
same target was achieved during Repelita IV.
Data as of November 1992
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