Indonesia’s House Approves 2015 State Budget; Budget Deficit 2.21% of GDP

Indonesia’s Budget Deficit in the Past Four Years:

	2012	2013	2014	2015
State Budget	1.53%	1.65%	1.69%	2.21%
Revised State Budget	2.23%	2.38%	2.40%
Realization	1.77%	2.33%

^{Source: Finance Ministry}

At the early stages of discussions between the House’s Budgeting Committee (Badan Anggaran) and the government, the budget deficit was proposed at IDR 224 trillion or 2.01 percent of GDP. However, after the government decided to optimize state expenditures, the deficit was raised to 2.21 percent of GDP. Optimization of state spending was conducted to increase fiscal room (IDR 15.5 trillion) and free up funds (IDR 5 trillion) for social protection in case the incoming Joko Widodo administration decides to raise prices of subsidized fuels at the end of 2014 or start of 2015.

Indonesian Finance Minister Chatib Basri commented that the smaller deficit is important to make the budget more sustainable (amid looming higher US interest rates which can increase borrowing costs for Indonesia).

Taking into account the additional expenditures, then state spending will total IDR 2,039.5 trillion (USD $170 billion). Indonesia’s Finance Ministry commented that this is the first time that state spending assumption exceeds the level of IDR 2000 trillion. Within five years, total state spending has thus nearly doubled from IDR 1,037.1 trillion in 2009 to IDR 2,039.5 trillion in 2015.

Meanwhile, state revenue in 2015 is set at IDR 1,793.6 trillion (USD $149.5 billion). Both revenue and expenditure are calculated using several macroeconomic assumptions, such as the GDP growth target of 5.8 percent y/y, inflation at 4.4 percent y/y, an average rupiah rate at IDR 11,900 per US dollar, 3-month government bond yield at 6 percent, and the Indonesia crude oil price (ICP) at USD $105 per barrel (with domestic oil production at 900,000 barrels per day).

The approved budget reserves IDR 414.6 trillion for subsidies, including IDR 276.1 trillion for fuel subsidies (with volume capped at 46 million kiloliters) and IDR 68.7 trillion for electricity subsidies. The remaining funds go to (non-energy) subsidies such as fertilizers and seeds for Indonesian farmers.

Previously, president-elect Joko Widodo, who will assume office on 20 October 2014, criticized the 2015 State Budget as it includes too much funds for energy subsidies (around 17 percent of total state expenditure goes to energy subsidies). Widodo (popularly known as Jokowi) prefers to cut fuel subsidies significantly and spend the available funds on economic and social development (such as infrastructure development, education and healthcare). Speculation has emerged that before the end of the year, prices of subsidized fuel will be raised by IDR 3,000 per liter in an attempt to free-up funds for his reform program. However, such a manoeuvre will trigger accelerated inflation in Southeast Asia’s largest economy.

Jokowi can revise the 2015 State Budget at the start of next year but public spending will be capped at a deficit of 3 percent of GDP.

Indonesian State Budget:

	Revised State     Budget 2015	State Budget           2014
A. Total State Income	1,793.6	1,667.1
I. Domestic Income	1,790.3	1,665.8
1. Tax Income	1,380.0	1,280.4
2. Non-Tax Income	410.3	385.4
II. Grants	3.3	1.4
B. State Spending	2,039.5	1,842.5
I. Central Government Spending	1,392.4	1,249.9
Ministerial Spending	647.3	637.8
Non-Ministerial Spending	745.1	612.1
II. Transfer to Regions	647.0	592.6

^{in trillion rupiah}

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