Indonesia's Parliament Approves Government's 2017 State Budget

It is widely known that in the 2016 State Budget the Indonesian government was much too enthusiastic, particularly about macroeconomic growth and government revenue (tax revenue). Initially, it targeted to see GDP growth at 5.3 percent (y/y) in 2016. However, this had to be revised down due to sluggish global growth, low commodity prices, weak domestic credit expansion, and the cut in government spending. The government had to cut spending in the last quarter of 2016 in order to prevent the budget deficit from widening too far. This wide budget deficit (perhaps touching 2.7 percent of GDP in 2016, up significantly from the initial target of 2.15 percent of GDP in the 2016 State Budget) is partly the result of weaker-than-targeted tax income. Despite the better-than-expected tax amnesty program, the government's tax revenue target in the 2016 State Budget was highly unrealistic.

In the 2017 State Budget the government wants to implement another cigarette excise tax hike, while removing some electricity subsidies. These measures should contribute to make the budget stronger.

In the 2017 State Budget, Indonesia targets a GDP growth figure of 5.1 percent (y/y). Contrary to last year when the government overestimated economic growth, it seems that the government now deliberately underestimates economic growth. If the government continues to hard work - and especially if there occurs an improvement in external conditions - this 5.1 percent target will most likely need to be revised upward somewhere next year. In the latest Indonesia Economic Quarterly report, released by the World Bank earlier this week, the Washington-based institution set its forecast for Indonesia's economic growth at 5.3 percent (y/y) in 2017. In this report the World Bank also complimented the Indonesian government for its efforts to improve fiscal management, citing adjustments in government expenditures and the ongoing tax amnesty program.

It is assumed that Finance Minister (and former World Bank managing director) Sri Mulyani Indrawati had considerable input in the preparing of the 2017 State Budget. Earlier, she indicated that a well-balanced budget is key to build a stronger economy. It is assumed that she wants to over-deliver rather than under-deliver next year.

Macroeconomic Assumptions:

	Macroeconomic Assumptions           2017 State Budget	Original 2016 State Budget
Government Revenue in IDR trillion	1,750.3	1,822
Government Spending in IDR trillion	2,080.5	2,096
Budget Deficit % of GDP	2.41	2.15
GDP Growth annual percent change	5.1	5.3
Inflation annual percent change	4.0	4.7
Exchange Rate IDR/USD	13,300	13,900
3-Month Notes coupon (%)	5.3	5.5
Crude Oil Price in USD per barrel	45	50
Oil Lifting barrels of oil per day	815,000	830,000
Unemployment percentage of labor force	5.6
Poverty percentage of population	10.5

^{Sources: Finance Ministry & Commission XI DPR}

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