A 1-Post Summary of Draft State Budget 2007 & Financial Notes

0. Background:

i) Year 2007 is third implementation year of 2004-2009 Mid Term Dev. Plan, whose preparation was based on vision and missions of President in attempt to realize targets of United Indonesia cabinet;
ii) Draft state budget 2007 has been based on stipulations of State Finance Law as guide to setting of Government Work Plan for 2007, Macroeconomic Frameworks, and Major Fiscal Policies for 2007;
iii) Major fiscal politics have been already pre-agreed to during preliminary discussions between GOI and DPR (23 May-21 June 2006).

1. Macroeconomic assumptions:
(i) growth, 6.3% (cf. 6.2% in APBN 2006 or 5,8% projected for 2006;
(ii) inflation, 6.5% (cf. 8% projected for 2006);
(iii) exchange rate of Rp 9.300/US$;
(iv) average 3-mo SBI rate, 8.5%;
(v) averageICP, US$65 per barrel; and
(vi) average lifting 1 million barrel/day.

2. Broad Strategy for 2007:
- First, to continue fiscal consolidation measures through control of budget deficit, up to 0.9 % GDP (1.2% in 2006), to balance rooms for triggering growth and employment creation;
- Second, to formulate financing strategy so as to reduce as much as possible debt burden and risk

3. Strategic moves to achieve desired deficit:
- First, improving tax and non-tax revenues: à policy renewal, tax and custom administration reform; also that of non-tax;
- Second, improving efficiency and effectiveness of state expenditure by sharpening allocations for central govt's priorities. This in turns calls for:
(a) improvement of income of govt officials and retired officers;
(b) servicing of debt interest;
(c) improvement of service quality in governmental operation and maintenance of state assets;
(d) Government's investment in infrastructure;
(e) Subsidizing for stablizing prices of goods and services;
(f) Improvement of budget allocation for education as mandated by Constitution 1945;
(g) Sustainability of direct subsidies to people in sectors of education and health; and
(h) development of biofuel and biodiesel as fuel alternatives.

- Third, improving efficiency and effectiveness of state expenditure by sharpening allocations for regional priorities. This in turns calls for:
(a) improvement in revenue-sharing calculation and accelleration of its distribution to regions;
(b) improving basic data needed for DAU calculation, which for 2007 has been allocated to amount to 26 % of net domestic revenue;
(c) increasing DAK allocation for regions with under-average financial capacity in provision of basic facilities and infrastructure in sectors of:
(i) education --> 9 years compulsory education;
(ii) health;
(iii) infrastructure: --> road, clean water and irrigation;
(iv) marine and fishery;
(v) agriculture;
(vi) governmental infrastructure; and
(vii) environment.

4. Revenue and underlying assumptions
State revenues plus grants are expected to reach Rp713.4 trillion (20.2% of GDP), or an increase by 14.1% from target of APBN 2006.Revenues amount to Rp 505,9 t (from taxes) and Rp 204.9 t (non-taxes). Tax ratio is estimated to reach 14.3 % of GDP, or higher than that in 2006 (13.7%).
Underlying assumptions:
- Better macroeconomic condition;
- Pipelined reforms in realms of tax, customs and duties, i.e through:
(a) modernization of functions of service provision and advocacy; (b) modernization of supervision function;
(c) modernization of supporting functions; and
(d) administrative and procedurial improvement in customs and duties.

5. Lower Non-Tax Revenue and Underlying Factors
Non-Tax Revenue (Rp204,9 t) is lower than that in revised budget of 2006 (Rp224,5 t) due to:
(a) less income from oil/gas, forestry, and fishery; and
(b) lower SOE dividends.

6. Expenditure
Expenditure totals to Rp746,5 t (21.1% of GDP), or an increase by 15.3 % of APBN-2006 projected ceiling.

Central govt's spending of Rp 496 t, or 16% higher than that allocated in 2006 state budget, is to cover:
(a) Personnel, Rp 98.5 t;
(b) Goods and Services, Rp 72.5 t;
(c) Capital expenditure, Rp 66.0 t;
(d) Interest Payment, Rp 85.1;
(e) Subsidies, Rp109.7;
(f) Social aids Rp 49.0 t, and;
(g) Other Current Expenditures, Rp 15.1 t.

7. Reasons behind higher central government's spending
(a) planned improvement of welfare of civil servants, retiring officers, and military and police officers through increases of basic-salary and structural and functional supports, daily food allowance (for police and military);
(b) more spending on goods to support governmental function and to improve public service;
(c) increase of subsidies to stabilize prices of goods and services, and;
(d) increase of sosial aids related to disasters.

8. Regional Expenditure
Regional govt's spending of Rp 250.5 t, or 13.8% higher than that allocated in 2006 state budget, is to cover:
(i) Balancing funds (BF) of Rp 243.9 t, including special autonomy funds (Rp 4.0t) and adjustment thereof (Rp 2.7t), totalling Rp 6.7 t.
BF consists of shared revenue (R/S) of Rp 65,8 t and DAU (Rp 163.7 t), and DAK (Rp14.4 t).

9. Budget Deficit and Financing
Deficit is planned at Rp 33.1t or 0.9% of GDP.
Domestic financing targets at Rp 51.3 t or 1.5% of GDP; net foreign financing is planned to reach a minus of Rp18.2 t (0.5% of GDP).

Portion of domestic financing are expected from:
- Domestic banking; Rp. 16.1 t
- Ex-moratorium funds (related to reconstruction and rehabilitation of NAD and Nias; (amount N/A)
- Privatization yields; Rp 2 t;
- Sales of banking assets under PT. PPA; Rp 1 t;
- Issuance of SUN, Rp 34,2 t.
(Minus discounting factors, such as govt's investment and infrastructure support)

Net foreign financing, - Rp 18.2 t. (It's negative)
- New loans, Rp 35.9 t (of which Rp 14.4 t of program type; Rp 21.4 project type)
- Debt service, - Rp 54.1 t.

(*)