Budgeting in Indonesia - OECD

1 ISSN 1608-7143 OECD Journal on BudgetingVolume 2009/2 OECD 20091 Budgeting in Indonesiaby J n R. Bl ndal, Ian Hawkesworth and Hyun-Deok Choi*This article discusses Indonesia s economic and fiscal performance following the 1997/98financial crisis and the transition to democracy, as well as the budget formulationprocess and the role of Parliament. Aspects of budget implementation are discussedthroughout the article.* J n R. Bl ndal is Deputy Head of the Budgeting and Public Expenditures Division, GOV, Hawkesworth is Administrator in the same division. At the time of writing, Hyun-Deok Choi wasAdministrator in GOV/BUD, on secondment from the Korean Ministry of Public Administration IN INDONESIAOECD JOURNAL ON Budgeting VOLUME 2009/2 ISSN 1608-7143 OECD 20092 PrefaceIn an exchange of letters between the indonesian Ministry of Finance and the OECD inthe summer of 2008, it was agreed that the OECD would prepare a profile of Indonesia sbudgeting process.

2 The profile would offer a general overview of Indonesia s system ofbudgeting. The profile concentrates on the national government profile is divided into three sections. The introduction discusses Indonesia seconomic and fiscal performance following the 1997/98 financial crisis and the transitionto democracy. The second section focuses on the budget formulation process. The thirddiscusses the role of Parliament. Aspects of budget implementation are discussedthroughout the OECD mission visited Jakarta in October 2008 to prepare this profile. During itsvisit, the mission met with senior officials from the various parts of the Ministry ofFinance, the National Development Planning Agency (BAPPENAS) and the Ministry of StateApparatus, as well as from several spending ministries and agencies.

3 The mission also metwith senior representatives of the indonesian Parliament and the Supreme AuditInstitution of the Republic of Indonesia (BPK).The mission would like to express its gratitude and appreciation to Mr. Mulia Nasution,the Secretary-General of the indonesian Ministry of Finance, for his support and the generoustime he and his senior colleagues shared with the mission during its stay in Jakarta. The warmand cordial reception by the indonesian authorities is gratefully , the mission would like to extend its gratitude to the World Bank for its supportin organising the mission and for its invaluable assistance during the mission s stay inJakarta and throughout the preparation of this views expressed in this profile are those of the OECD Secretariat and should notbe attributed to governments of OECD member countries, or to any organisation orindividual consulted for this IntroductionIndonesia has historically maintained a responsible and conservative fiscal policy.

4 Focused on sustaining aggregate fiscal discipline. In the years prior to the Asian financialcrisis, the budget had a moderate surplus (1-3% of GDP) and public debt was relatively low(25% of GDP). The country enjoyed a high rate of economic growth and thus expandingpublic resources and development policies were at the Asian financial crisis affected Indonesia s economy profoundly. The economyshrank by over 13% of GDP in 1998. Government debt rose dramatically in 1997 and 1998and reached almost 100% of GDP in 1999, reflecting the cost of providing liquidity andeventually the take-over of the banking financial crisis triggered political upheaval in Indonesia , with the resignation ofthe long-serving president.

5 The country experienced a series of successive governments asBUDGETING IN INDONESIAOECD JOURNAL ON Budgeting VOLUME 2009/2 ISSN 1608-7143 OECD 20093new democratic constitutional arrangements were being finalised. Today, the Parliament isfreely elected and has assumed great powers, not least in the area of Budgeting . ThePresident, who was previously appointed by Parliament, became directly elected. Greatpower was also devolved from the centre to regional governments with the big bang decentralisation , fiscal policy continued on a responsible and conservative track and acted as ananchor for the whole economy.

6 In fact, prudent budget policy is generally seen as having beeninstrumental in the economic recovery. Even during the height of the fiscal crisis, deficits weremodest (reaching a high of of GDP). This situation was the result of major expenditurecuts largely in public investment and other development expenditures to offset lower levelsof revenue and rising interest expenditures to finance the growing level of recent years, the government s deficit has ranged between and of levels have come down substantially, reaching 35% of GDP in 2008. This situationreflects the steadily improving economic performance as well as the proceeds from thesale of assets taken over during the significant changes have occurred to the composition of expenditures overtime.

7 First, and as noted above, public investment and other development expenditureswere cut significantly immediately following the crisis to fund sharply higher interestBox : A short descriptionIndonesia is the world s largest archipelago-state, consisting of some 17 000 islands allstraddling the equator. These include five major islands: Sumatra, Java, Kalimantan( indonesian Borneo), Sulawesi, and the indonesian part of New Guinea, known as Papua orIrian Jaya. The distance from west Indonesia to east Indonesia is 5 150 kilometers, slightlyless than the distance between Paris and New York. The capital of Indonesia , Jakarta, islocated on the island of s population of 235 million people makes it the fourth most populous countryin the world, following China, India and the United States.

8 Indonesia s population isoverwhelmingly Muslim (85%), making it the world s largest Islamic country. Otherreligions include Christianity (11%) and Hinduism, Buddhism and Confucianism (4%). Indonesia is a secular state. Its national motto, Unity in Diversity , reflects the manyethnic and cultural backgrounds of its is Indonesia s official symbol. This mythological bird has 17 feathers on eachwing, 8 on the tail and 45 on the neck. These numbers stand for the date Indonesiaproclaimed its independence from the Netherlands: 17 August Indonesia is the national language. It is similar to Malay and written in Romanscript based on European is endowed with vast natural resources, including oil and natural gas, coal, tin,copper, nickel ore, bauxite, copper, coal, silver, and gold as well as was the hardest-hit Asian country during the 1997/98 Asian financial crisiswhich resulted in political and social disorder.

9 The long-serving president resigned andIndonesia embarked on its transition to democracy. Today, Indonesia is a thriving has suffered many shocks since its transition to democracy, includingrepeated natural disasters. The heaviest losses were sustained in the December 2004tsunami which claimed over 200 000 lives and displaced over 300 000 IN INDONESIAOECD JOURNAL ON Budgeting VOLUME 2009/2 ISSN 1608-7143 OECD 20094expenditure. This situation has now been reversed, with lower interest expenditure givingroom for increased public investment and other development expenditures as well asincreased spending on education and health.

10 Second, a significant amount of operatingexpenditure (salaries and other running costs) was transformed into transfer paymentsto regional governments, as they assumed many government services through thedecentralisation programme. Third, fuel and electricity subsidies weighed heavily on thebudget. Despite significant cuts in the subsidies, fuel subsidies accounted for almost 20%of spending in 2008, up from about 13% in 2007, owing to high international oil prices. Fuelsubsidies are discussed further in Sub-section government has also placed emphasis on strengthening the revenue side of thebudget by increasing the share of non-oil and gas receipts.