Imagine how the new Indonesia would prosper if everyone had affordable health insurance, every child completed secondary education and highways were in place connecting Indonesia’s three biggest cities: Jakarta, Surabaya and Medan.
The good news is that today Indonesia’s main challenge is not to save resources but to spend them wisely. This still remains the case, even in the face of the global financial crisis. Despite its position of relative strength, Indonesia has two main weaknesses: the allocation of funds and the implementation of its budget. Despite some impressive steps to rein in subsidies, significant resources are still being spent on subsidies that benefit the well-off, mainly on fuel, electricity and fertilizers. In 2008, subsidies consumed an estimated 23 percent of total government spending. Indonesia also spends a disproportionately large share on “government apparatus,” at 13 percent of the total budget (see chart 1). Interestingly, this is not due to a bloated central government civil service. Instead, it is driven by regional governments, who spend a staggering 32 percent on themselves.
|Chart 1: Indonesia spends a disproportionately large share on “government apparatus,” at 13 percent of the total budget.
Indonesia is having a particularly hard time spending its budget, especially on infrastructure. Due to complicated budget approval procedures, it often takes the government six months into the budget year before it starts to implement its capital budget. In recent years, Indonesia has typically spent less than 20 percent of its capital budget in the first half of the year and 80 percent in the second half. In some years, 50 percent of the capital was spent in the final two months of the year – only to revert back to almost zero in January of each year! This stop-go approach to budgeting has been one of the reasons it has been so difficult to implement a more ambitious infrastructure program. But efforts to improve budget implementation are starting to pay off. After the first quarter of 2009, Indonesia had spent 10 percent of its planned capital budget – up from 5 percent in 2008 – but still below the norm of 25 percent.
The next five years will be very interesting indeed. Indonesia will have a new government by the end of this year and will also enact a new five-year development plan. If Indonesia continues to weather the global crisis as well as it has done thus far, its budget is expected to increase substantially – to about US$130 billion – making the five-year plan a US$550 billion package. Let’s hope the government succeeds in implementing some of the big development projects that Indonesia so desperately needs. If past trends continue over the next five years, Indonesia will expand education but fall short in health and infrastructure investment, both of which will receive substantially lower allocations than subsidies or “government apparatus” (see chart 2). If these trends change, there will be an enormous opportunity to spend a much larger amount of resources on Indonesia’s development, in particular health and infrastructure.
|Chart 2: If past trends continue over the next five years, Indonesia will expand education but fall short in health and infrastructure investment.|