Rising Indonesian budget deficit puts Widodo in a tight spot

Indonesia's army chief of staff General Gatot Nurmantyo
PHOTO: Jakarta Post/Asia News Network

JAKARTA - A legislated cap on Indonesia's budget deficit has created a headache for President Joko Widodo and could leave his agenda at the mercy of a parliament he does not control.

With growth at a six year-low, the currency not too far from its weakest since the Asian financial crisis and investors wanting more reforms to go ahead, a political stalemate would further weaken confidence.

If the deficit tops 3 percent of gross domestic product, thus breaking a 2003 law, some opposition politicians say this could spark a bid to impeach the president - though that's a remote possibility.

The ceiling might be breached when 2015 accounts are eventually completed, as tax collection has been far below ambitious targets.

With resource revenue tumbling, the 2015 deficit will be the largest for at least 25 years. It's now forecast at 2.78 percent, from an initial 1.9 percent estimate, excluding deficits run by local governments.

"If the law is broken, we can impeach the government," said Fadel Muhammad, a member from opposition party Golkar who heads parliament's finance commission. "We suggest (the government) does not let it happen." One reason impeachment is highly unlikely is that to start the process, two-thirds of the 560 legislators - or 374 - would have to ask a court if there are grounds to remove the president, and the opposition has only 204 seats.

The deficit-cap law does not mention impeachment, or specify any sanctions for an offending government, so no one knows what might happen if the 3 percent cap is broken. "For laws that don't have clear sanctions, what happens depends on the political constellation," said Refly Harun, a constitutional lawyer.

Willgo Zainar, a member of parliament from the opposition Gerindra party, said breaking a law would have consequences and Parliament "will question the president's accountability".

SINKING COMMODITIES Indonesia, Southeast Asia's largest economy, has taken a hit from slowing growth and sinking commodity exports.

In January-October, the government collected 1,100 trillion rupiah ($80 billion) in revenue, just 62 percent of the year's targeted total, as receipts dropped by 9.8 percent.

While tax takings have fallen, the government has aimed to step up spending, particularly for infrastructure, to boost slack growth, which has contributed to a rising budget deficit.

At the same, Widodo has pledged tax breaks to companies in a bid to draw more investment, especially in manufacturing. But with the deficit getting near 3 percent, any foregone revenue would likely require spending cuts.

This is the first time there's a significant chance the cap will be breached. "We are being vigilant," said Darmin Nasution, the chief economy minister, when asked if he was worried by the deficit."It is already near 3 percent." Last week, the finance ministry said it would assume local governments would run budget deficits equal to 0.1 percent of gross domestic product this year. The previous assumption was 0.3 percent.

GETTING MORE LEEWAY

That revision gives the central government a bit more leeway. Finance Minister Bambang Brodjonegoro said the government could safely run a deficit of 2.9 percent, though it would still seek to limit the shortfall to 2.5-2.7 percent.

Even if the deficit does not breach the limit in 2015, the years when Indonesia ran small deficits are over, economists say, so it seems only a matter of time before it does. "We think it's become a 2-3 percent of GDP fiscal deficit economy," ING Bank analysts wrote in a report.

When parliament passed the deficit law in 2003, Indonesia was struggling to restore confidence with its creditors after the Asian crisis.

More than a decade later, however, the case for strict deficit controls is less obvious. Some economists are calling for them to be relaxed, so that spending to build roads, ports and power stations can be maintained.

But Nasution said revoking the cap was not under consideration. "The global economy is facing too many deficits and loans,"he said.

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