Cablegate: Parliament Passes 2007 Budget

VZCZCXRO5529
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #2775/01 2931015
ZNR UUUUU ZZH
R 201015Z OCT 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 1515
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 0060
RUEHBJ/AMEMBASSY BEIJING 3689
RUEHBY/AMEMBASSY CANBERRA 0035
RUEHUL/AMEMBASSY SEOUL 3783
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 04 JAKARTA 012775

SIPDIS

SIPDIS

DEPT FOR EAP/IET AND EB/IFD/OMA
TREASURY FOR IA-SEARLS
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR FINEMAN

E.O. 12598: N/A
TAGS: EFIN KMCA KCOR PGOV ENRG TBIO ID
SUBJECT: PARLIAMENT PASSES 2007 BUDGET

1. (SBU) Summary. Parliament approved a Rp 763.6 trillion
(USD 83.4 billion) FY 2007 budget on October 17. Spending
for personnel, materials and social programs is slated to
rise significantly in 2007 in line with President
Yudhoyono's plans to reform the civil service and improve
health and education standards in the country. Spending on
fuel and electricity subsidies is set to decline slightly in
2007, but continues to account for 17 percent of central
government expenditures. The Government of Indonesia (GOI)
expects a significant increase in tax receipts in 2007, as
illustrated by the projected 20% increase in tax receipts.
Despite the spending increases, Indonesia's fiscal policy
remains tight, with a projected deficit of 1.1% of GDP, down
from the 1.3% of GDP target for FY 2006. The GOI's 2007
financing plan includes an anticipated Rp 3.3 trillion in
privatization receipts, Rp 1.3 trillion of which the GOI
will plow back into "equity injections" in state-owned
enterprises. For the second year in a row, the budget also
contains a Rp 2 trillion ($218 million) financing line item
to support the GOI's infrastructure development program.
This report uses the October 17 market exchange rate of Rp
9,155/USD for all conversions. End Summary.

2. Parliament completed work on the GOI's 2007 budget on
October 17. Table 1 outlines the major revenue, expenditure,
and financing items in the budget. The Ministry of Finance
has not yet finalized detailed spending allocations for
individual programs.

--------------------------------------------- ------
Table 1: FY 2007 and FY 2006 Budgets
--------------------------------------------- ------
FY 2006 FY 2007
Items (1) Rp % of Rp % of
Trill GDP Trill GDP
--------------------------------------------- ------
A. Total revenue 659.1 21.1 723.1 20.5
I. Domestic revenues 654.9 21.0 720.4 20.4
Tax revenues 425.0 13.6 509.5 14.4
Domestic taxes 410.2 13.2 494.6 14.0
Income tax 213.7 6.9 261.7 7.4
1. Oil and gas 38.7 1.2 41.2 1.2
2. Non oil/gas 175.0 5.6 220.5 6.2
Value added tax 132.9 4.3 161.0 4.6
Land/bldg tax 18.1 0.6 21.3 0.6
Duties on land/
building transfer 4.4 0.1 5.4 0.2
Excise tax 38.5 1.2 42.0 1.2
Other taxes 2.6 0.1 3.2 0.1

Int. trade tax 14.8 0.5 14.9 0.4

Non-tax revenues 229.8 7.4 210.9 6.0
Natural resources 165.7 5.3 146.3 4.1
SOE profits 22.3 0.7 19.1 0.5
Other 41.8 1.3 45.6 1.3

II. Grants 4.2 0.1 2.7 0.1

B. Expenditures 699.1 22.4 763.6 21.6
Central govt. exp. 478.2 15.3 504.8 14.3
Routine 135.3 4.3 170.4 4.8
-Personnel 79.2 2.5 98.5 2.8
-Material exp. 56.1 1.8 71.9 2.0
Capital exp. 69.5 2.2 76.9 2.2
Interest payments 82.5 2.6 85.1 2.4
Subsidies 107.6 3.5 102.9 2.9
Social assistance 41.0 1.3 50.7 1.4
Other current exp. 42.3 1.4 18.8 0.5

Transfer to regions 220.8 7.1 258.8 7.3

--------------------------------------------- ------
Primary balance 42.5 1.4 44.6 1.3
--------------------------------------------- ------
Overall balance (40.0) (1.3) (40.5) (1.1)
--------------------------------------------- ------
Financing 40.0 1.3 40.5 1.1
Domestic financing 55.3 1.8 55.1 1.6
Domestic banks 17.9 0.6 13.0 0.4
Privatization (net) 1.0 0.1 2.0 0.1
Asset restructuring 2.6 0.1 1.0 0.0

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Govt Bonds 35.8 1.1 40.6 1.1
Infrastructure Fund (2.0) (0.1) (2.0) (0.1)
Foreign financing (net) (15.3) (0.5) (14.5) (0.4)
Gross drawing 37.5 1.2 40.3 1.1
Program loan 12.1 0.4 16.3 0.5
Project loan 25.5 0.8 24.0 0.7
Amortization of
foreign debt (52.8) (1.7) (54.8) (1.6)

(1) Column totals may not add perfectly due to rounding.

Expenditure Highlights
-----------------------

3. Key spending highlights of the budget include:

--The GOI significantly increased routine spending on
personnel and material expenditures. Personnel spending
will increase 24% in nominal terms over 2006 and includes a
15% increase in base salaries and retirement benefits for
the civil service, the military, and the police; an increase
in teacher allowances; and a 20% increase in official per
diem for the police and the army.

--Fuel and electricity subsidies, although smaller than in
2006, remain significant at Rp 61.9 trillion ($6.8 billion)
and Rp 25.8 trillion ($2.8 billion), respectively. The high
level of fuel subsidies continues to impede government
spending on capital investment. Capital expenditures
(formerly classified as development expenditures) increase
by only 11% in nominal terms over 2006 levels to Rp 76.9
trillion ($8.4 billion).

--The GOI will channel the bulk of 2007 social expenditures
through line ministries via several social assistance
programs. These include direct subsidies for education and
health programs, funding for the "national community
building program", and a Rp 2.8 trillion ($306 million)
conditional cash subsidy program. The conditional cash
subsidy represents an extension of the Rp 15.6 trillion
($1.7 billion) cash subsidy program the GOI introduced in
2006 to ameliorate the impact of the October 2005 fuel price
hikes. The social assistance line item also include a Rp 2
trillion ($ 218 million) emergency reserve and disaster
mitigation fund.

--Other expenditures drop by 56% compared to 2006, mainly
due to the GOI's reclassification of the direct cash subsidy
program.

--Transfers to regions increases by a nominal 17% over the
previous year in the 2007 budget to Rp 258.8 trillion ($28.3
billion), or 7.3% of GDP. The increase includes a 10.4%
increase in natural resources revenue sharing funds (Revenue
Sharing Fund or DBH) to Rp 68.5 trillion ($7.5 billion), and
a 13% increase in the General Allocation Fund (DAU) to Rp
164.8 trillion ($18 billion). As in previous years, no
region will receive less than last year; however, 2007 will
be the last year that the DAU will increase consistently for
all regions. Starting 2008, the GOI intends to share funds
more equitably across regions, requiring resource-rich
regions to "transfer their surplus" to under-resourced
regions.

--In line with President Yudhoyono's policy to increase
spending on social development, the Ministry of Education
(MOE) receives the ministry highest budget allocation at Rp
43.5 trillion ($ 4.7 billion), or 9% of central government
spending. Further, the GOI has allocated an additional Rp
1.8 trillion ($197 million) for nationwide education
assistance programs, to be managed jointly by MOE and
Ministry of Religious Affairs. The amount of funds
allocated to the Ministry of Health increases by 20%
compared to the previous year, rising to Rp 17.1 trillion
($1.9 billion). The GOI allotted a portion of the increase
to rural health clinics and local hospitals.

4. Table 2 lists the allocations for the ten agencies that
receive the largest budgets 2007. The allocation for all
major agencies increased, with the exception of the Aceh
Rehabilitation and Reconstruction Agency (BRR).

JAKARTA 00012775 003 OF 004

--------------------------------------------- -----
Table 2: FY 07 Budget Allocation By Ministries/
Agencies (in trillions of Rupiah)
--------------------------------------------- -----
Ministries/ 2006 2007 % Increase
Agencies Budget Budget
--------------------------------------------- -----
Education 39.5 43.5 10.1
Defense 27.0 31.3 15.9
Public Works 18.3 24.2 32.2
National Police 16.0 19.0 18.8
Health 14.2 17.1 20.4
Religious Affairs 10.6 13.0 22.6
Transportation 8.0 10.4 30.0
BRR (1) 11.5 10.0 -13.0
Finance 6.6 9.4 42.4
Agriculture 6.2 8.7 40.3

(1) Aceh Rehabilitation and Reconstruction Agency

Revenue and Financing Highlights
--------------------------------

5. The 2007 budget projects a 10% nominal increase in
revenue over 2006 levels to Rp 723.1 trillion ($79.0
billion). The increase is predicated on higher tax
receipts, which are expected to increase by 20% in nominal
terms to Rp 509.5 trillion ($55.6 billion) or 14% of 2007
GDP. Tax revenue accounts for approximately 70% of total
domestic revenue in the 2007 budget. On the other hand, the
GOI expects lower revenues from natural resource sources,
with natural resource tax and non-tax revenues falling from
Rp 198.5 trillion ($21.7 billion) in 2006 to Rp 181.1
trillion ($19.8) in 2007. Table 3 summarizes revenues for
FY 2007.

6. The projected 2007 budget deficit is Rp 40.5 trillion ($
4.4 billion), equivalent to 1.1% of GDP. Notably, the 2007
projected deficit to GDP ratio is lower than in 2006,
despite calls for increased government spending to spur
growth. The GOI will finance the deficit through a
combination of domestic and foreign bond issuance. The MOF
has not announced a financing plan for 2007, but in 2006 the
GOI financed a deficit of a similar magnitude with an
approximately 50/50 mix of rupiah and dollar bonds. The
budget also signals the resumption of a limited
privatization program with a Rp 3.3 trillion ($360 million)
line item for gross privatization proceeds, Rp 1.3 trillion
($ 142 million) of which is netted out in the form of
"capital injections" into several state-owned enterprises.
For the second year in a row, the budget also contains a Rp
2 trillion ($218 million) infrastructure funding line item.
The GOI plans to use these funds to establish a revolving
fund for land acquisition and a contingency fund to cover
the cost of GOI guarantees for infrastructure projects.
Table 4 provides breakdowns on budget financing sources.

---------------------------------------------
Table 3: FY 07 Financing
(in trillions of Rupiah)
---------------------------------------------
Items 2006 Budget 2007 Budget
---------------------------------------------
Primary balance 42.5 44.6
-----------------------------------------
Deficit (0 .0) (40.5)
Financing 40.0 40.5
-- Domestic (net) 55.3 5511
- Bank financing 17.9 13.0
Privatization 1.0 2.0
- Asset restructuring 2.6 1.5
- Govt bonds (net) 35.8 40.6
- Infrastructure Fund (2.0) (2.0)
-- Foreign loans (net) (15.3) (14.5)

Mostly Credible Budget Assumptions
----------------------------------

7. Table 4 outlines the economic assumptions underlying the
FY 2007 budget. The assumptions are important because they
influence various revenue, spending, and financing items in
the budget. For example, if the GOI adjusts the USD/Rp

JAKARTA 00012775 004 OF 004

assumption upward, the value of Indonesia's USD oil exports
calculated in rupiah rises, while the rupiah value of
Indonesia's USD debt service also rises. Most observers
regard the assumptions as credible, with the possible
exception of the projected 6.3% real GDP growth rate in
2007, which is on the high side of many economists'
forecasts.

--------------------------------------------- -----
Table 4: FY 2007 Budget Assumptions
--------------------------------------------- -----
2006 Budget 2007 Budget
--------------------------------------------- -----
Real GDP growth (1) 5.8 6.3
CPI inflation 8.0 6.5
USD/IDR (avg) 9,300 9,300
3-month SBI rate (avg) 12.0 8.5
Budget deficit (2) 1.3 1.1
Average oil price (3) 64 63
Oil production (4) 1,000 1,000

(1) Percent.
(2) As a percent of GDP
(3) Indonesia Crude Price (ICP) in US$ per barrel
(4) In million barrels per day

PASCOE

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