Indonesia - Statements

Critique of Draft 2013 State Budget v. Draft Alternative Budget for 2013: Idolizing Economic Growth and the Bureaucracy; Ignoring Public Welfare

indonesian moneyOn 16 August, as usual, the President addressed the House of Representatives (DPR), presenting the government's annual financial statement and draft 2013 State budget (known as APBN). Repeating the pattern of previous years, this latest draft budget does not hold out much hope of meaningful enhancement of public welfare. We, the Civil Society Coalition for Welfare-Based APBNs, have drafted an "Alternative Budget for 2013"; and we have identified several problems in the government's draft 2013 APBN, as follows:

The draft APBN's macro-economic assumptions idolize growth and ignore public welfare. Yet again the government's macro-economic assumptions are not consistent with the realities of Indonesian society and other public welfare indicators. The government is prioritizing achievement of economic growth of 6.8%, but the sort of growth envisaged can in some ways inflict suffering on parts of the community. By contrast, our draft alternative APBN envisages a lower rate of growth—just 6.56%—but holds out the promise of better quality growth, given its focus on real sectors of the economy (agriculture and processing industries in particular) that absorb more workers than other sectors and have an impact on poverty. It is for these reasons that budgetary stimulus should particularly target those sectors. Our draft alternative APBN does just that; and accordingly holds out the promise of better quality growth in those two sectors than that proposed by government.

The government's macro-economic indicators do not reflect social realities. Income inequality—measured by the "Gini ratio"—and numbers engaged in the informal sector are important macro-economic indicators that bear upon the quality of economic growth. Assumptions relating to these indicators have been factored into our draft alternative APBN to ensure that economic growth genuinely reaches the majority of the community. Indonesia's Gini ratio has deteriorated over the past seven years: in 2011 it was 0.41. Never before in the history of our economy has income inequality been so high. In light of that, the assumed Gini ratio in our draft alternative APBN for 2013 has been lowered to 0.35 (in the hope that each year it will go down further until it falls below 0.3). Another macro-economic assumption relates to the workforce: while Indonesia's "open unemployment" rate (those who work less than one hour/week) is very low—just 6.32% as of February 2012—the percentage of Indonesia's workforce engaged in the informal sector (also in February 2012) is as high as 62.71%. These numbers point to the poor quality of our workforce. These indicators were factored into our alternative APBN in the hope that informal sector participation would drop to 55% (on a par with China, but still above that of Malaysia). As for macro-economic assumptions on poverty and unemployment, we believe that the government's definition of poverty is inconsistent with principles of a just and civilized human society. To define a poor person as one receiving less than Rp 248 704 per month, as the government does, is to ignore the spirit of values attaching to the human condition. But it has to be said also that the international poverty line of US$2/day also does not tell the real story, particularly given varying prices for goods from one country to another. In an effort to strike a balance between these two measures of poverty, our alternative APBN takes Central Bureau of Statistics (BPS) data as its point of reference: by combining BPS categories of "very poor", "poor" and "almost poor" we arrive at a figure of 55.52 million poor (22.8% of the population). On this basis the poverty line is set at Rp 298 448 per month (or around Rp 10 000/day). The target for 2013 is to reduce the number of poor to 20.5% of the population (a reduction of five million). Also, instead of using "1 hour per week" as the yardstick for "open unemployment", our alternative budget uses the measure of "less then fifteen hours per week". We did this because people working less than fifteen hours/week have incomes below Rp 350 000 (only slightly above the poverty line used in our alternative budget). As of February 2012, around 12.5% (BPS, 2012) of Indonesians were either not working (i.e. working for less than one hour/week) or working for between one and fourteen hours/week; our alternative budget would reduce that number to 11% during 2013.

The tax ratio in the draft 2013 APBN is still way below what is actually possible for Indonesia. The government projects a tax ratio of 12.7% of GDP for 2013 on the grounds that the actual ratio will be higher than that when oil and gas and regional taxes are included—a procedure used by OECD countries; on that basis the effective tax ratio in 2012 was 15.8%. But the government has forgotten that in 2003, long before the Director-General of Taxation started to receive extra remuneration, our tax ratio—excluding oil & gas and regional taxes—was already 14%. Surely, after being paid extra remuneration, the Director-General could be expected to have achieved a tax ratio higher than the 2003 number.

The bureaucracy is the biggest beneficiary of bigger budgets. According to the government's 2013 financial statement, the monetary value of the 2013 APBN will be Rp 1 657 trillion, an increase of 7.1% (Rp 109.6 trillion) over 2012. But bureaucrats will enjoy double that percentage increase with their 14% larger budget: Rp 28 trillion in 2013. In comparison, the amount to be allocated for capital expenditure is Rp 25 trillion for capital expenditure. This ballooning of civil service costs is attributable in part to the cost of civil service pension schemes funded by the State since 2009—they now cost Rp 74 trillion pa (35% of total civil service costs); other items are: extra remuneration for civil servants—extended to all central government ministries and institutions in 2013; and an ever increasing number of new off-line government agencies.

Capital expenditure remains ineffective. Although still less substantial than funding for civil service costs, the 2013 budget for capital expenditure will increase by Rp 193.8 trillion over 2012. But the numbers should not be taken at face value: in 2012 only 32% of APBN capital expenditure funding was expended on programs of real utility to the economy. And FITRA's research into APBN 2011 found, for example, that a lot of capital expenditure funding was directed at meeting bureaucratic needs: computers/notebooks, official vehicles and government buildings. In light of this experience, our alternative budget for 2013 proposes capital expenditure of Rp 200 trillion with at least 60% to be appropriated for projects of genuine economic utility and 75% to be channeled into regions outside Java.

Regional fiscal transfers are being manipulated. Fiscal transfers to regions are projected to increase by Rp 40.1 trillion to Rp 518 trillion. But in fact, as in previous years, regional transfers will not rise above 31% of total APBN expenditure. Indeed, the largest single component of transfers to regions—the General Allocation Fund (DAU)—will be less that the DAU formula provides for: the government is to include subsidies on the list of items to be deducted from funding destined for distribution via the DAU. Furthermore, in breach of the law on Fiscal Balance Transfers between the Center and Regions, the government will continue "adjustment" funding programs, this time in the form of the Local Government and Decentralization Project (P2D2 for short) to be funded by World Bank loans. In our alternative budget we propose that transfers to regions be increased to Rp 550 trillion; that the normal formula for calculating the DAU be maintained at 26% of net domestic revenue; and that funds previously advanced to regions to fund centrally delegated functions or tasks jointly administered by the Center and regions be redirected as transfers to regions to fund what now amount to local government functions.

The APBN has, as always, been framed as a deficit budget, leaving doors open for inefficiencies and corrupt activities. Deficit budgeting makes APBNs beholden to outside players—foreign entities and multilateral institutions; it subjects APBNs to a barrage of interests not in line with the national interest; and it means that Indonesian fiscal sovereignty has not yet become a reality. Accordingly, our alternative APBN for 2013 has been designed as a balanced budget to avoid a situation where, in the long term, State fiscal space is constricted by burdens of debt servicing.

In light of the above, the Civil Society Coalition for Welfare-Based APBNs urges the House of Representatives to use its budgetary powers to revamp the macro-economic assumptions and overall shape of the government's draft 2013 APBN to ensure that they accord with Constitutional mandates on public welfare; and that the DPR does not become caught up in project-by-project discussion of the APBN with budget mafias.

Jakarta, 24 Agustus 2012

Civil Society Coalition for Welfare-Based APBNs



1. Prof Ahmad Erani Yustika (INDEF/National Board of FITRA) 0812330355

2. Yuna Farhan (Secrtary-General of FITRA) 08161860874

3. Dani Setiawan (Coordinator, Kaolisi Anti Utang) 08129671744

4. Abdul Waidl (P3M/Secretary-General of KAI) 081280821339

5. Gunawan (Secretary-General of IHCS) 081584745469

Photo Courtesy of EHow Money.