VZCZCXYZ0000
RR RUEHWEB

DE RUEHJA #1379/01 2561027
ZNR UUUUU ZZH
 131027Z SEP 06
FM AMEMBASSY JAKARTA
TO RUEHC/SCSTATE WASHDC 9980
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 0013
RUEHBJ/AMEMBASSY BEIJING 3639
RUEHBY/AMEMBASSY CANBERRA 9920
RUEHUL/AMEMBASSY SEOUL 3747
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 05 JAKARTA 011379 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/IET AND EB/IFD/OMA 
TREASURY FOR IA-SETH SEARLS 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR FINEMAN 
 
E.O. 12598: N/A 
TAGS: EFIN KMCA KCOR PGOV ENRG TBIO ID
SUBJECT: INDONESIA - 2007 BUDGET RAISES SOCIAL SPENDING 
 
REF: A) JAKARTA 9526 (2006 Budget Revisions) 
     B) JAKARTA 9864 (Biofuels) 
 
JAKARTA 00011379  001.12 OF 005 
 
 
¶1. (SBU) Summary.  The Government of Indonesia's (GOI) Rp 
746.5 trillion (USD 82.1 billion) draft 2007 budget proposes 
double digit percentage increases in spending on health, 
education and social welfare programs, with the total amount 
of central government spending on these programs reaching Rp 
64.1 trillion (USD 7.1 billion).  Despite these increases, 
subsidies and interest expenses remain the largest spending 
line items at Rp 109.7 trillion and Rp 85.1 trillion 
respectively (USD 12.1 and 9.4 billion).  The draft budget 
also proposes a 23 percent increase in personnel spending 
for the central Government, as well as Rp 1.3 trillion (USD 
143 million) in "equity injections" for troubled state owned 
enterprises (SOEs).  It predicts higher tax revenues of Rp 
505.9 trillion (USD 55.6 billion) or 14.3% of GDP, an 
ambitious target that may be difficult to reach.  The draft 
budget proposes a FY 2007 deficit of Rp 33.1 trillion (USD 
3.6 billion), or 0.9% of GDP, which the GOI will cover 
through a mix of government bonds and bank financing. 
President Susilo Bambang Yudhoyono (SBY) followed up his 
national budget speech with a similar speech to the Council 
of Regional Representatives (DPD) on August 23 urging 
implementation of national government priorities including 
education and disaster preparedness.  The Ministry of 
Finance (MOF) hopes to finalize the 2007 budget by October 
¶17.  The GOI may move to three-year budgets beginning in 
¶2008.  End Summary. 
 
¶2. (U) Note. This report uses the August 16 Rp 9,090/USD 
market exchange rate rather than the GOI's budget assumption 
exchange rate of Rp 9,300/USD .  The GOI uses a calendar 
year fiscal year.  End Note. 
 
Macroeconomic Assumptions Realistic 
----------------------------------- 
 
¶3. (U) SBY presented the draft 2007 budget during his annual 
state-of-the-nation address to Parliament on August 16. 
Parliament plans to finish the budget by October 17.  The 
macroeconomic assumptions underlying the budget are 
generally realistic, with the possible exception of the 6.3% 
projected rate of economic growth for 2007.  Real economic 
growth during the first half of 2006 was 5.2%, and most 
economists project growth in 2007 to reach the 5.7 - 6.0% 
range.  The budget assumptions are important because they 
influence various categories of revenues and expenditures. 
For example, if the GOI adjusts the USD /Rp 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. 
 
----------------------------------- 
Table 1: FY 2007 Budget Assumptions 
----------------------------------- 
                         2006             Draft 
                     Revised Budget    2007 Budget 
--------------------------------------------- ----- 
Real GDP growth (1)      5.8             6.3 
CPI inflation            8.0             6.5 
USD /IDR (avg)            9,900           9,300 
3-month SBI rate (avg)   12.0            8.5 
Budget deficit (2)       1.3             0.9 
Average oil price (3)    64              65 
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 
 
Social Spending and Civil Service Salaries Rise 
--------------------------------------------- -- 
 
¶4. (U) In his budget address, SBY strongly emphasized his 
commitment to education, noting that education would receive 
its highest budget allocation ever at Rp 51.3 trillion (US$ 
5.7 billion) or 10.3% of the total central government 
spending.  This is an increase from Rp 43.9 trillion (USD 
4.8 billion) in 2006, and includes Rp 12.6 trillion (USD 1.4 
 
JAKARTA 00011379  002 OF 005 
 
 
billion) to continue two nationwide education assistance 
programs launched in 2005.  The President urged the regions, 
in his DPD speech on August 23, to give education a top 
priority, including the repair of school buildings, many of 
which have not been in poor condition for a decade or more. 
The allocation for health also increased by 20% from last 
year to Rp 15.3 trillion (USD 1.7 billion).  This includes 
an additional Rp 3.6 trillion (USD 387 million) in spending 
for rural health clinics (Puskesmas) and local hospitals. 
 
¶5. (U) In a significant anti-poverty policy shift, the draft 
budget contains Rp 4 trillion (USD 440 million) to pilot a 
conditional cash transfer program in six provinces in 2007. 
Under this program, participants would have to meet certain 
conditions, such as keeping children in the family in 
school, in order to receive quarterly cash transfers. 
Importantly, the 2007 draft budget also contains an overall 
23.3% increase in personnel spending for the civil service. 
This included a 15% increase in base salaries for the civil 
service, military, and police and pensions; a higher 
allowance for teachers; and a 20% increase in official per 
diem for the police and Ministry of Defense. 
 
Subsidies, Interest, and Transfers to Regions 
--------------------------------------------- 
 
¶6. (U) The draft 2007 budget estimates total subsidy 
spending will rise to Rp 109.7 trillion (USD 12.1 billion), 
approximately 15% of total spending.  Fuel subsidies will 
increase by 7% to Rp 68.6 trillion (USD 7.6 billion). 
Electricity subsidies paid to state electricity company PLN 
fall 17% in nominal terms, but will remain substantial at Rp 
25.8 trillion (USD 2.8 billion).  SBY's remarks and the 
magnitude of the subsidy allocations is a clear sign the GOI 
anticipates no further fuel price hikes through 2007.  The 
GOI also allocated a separate, Rp 1 trillion interest 
subsidy for biofuel development, as well as a Rp 5.8 
trillion (USD 638.1 million) fertilizer subsidy.  The method 
for fertilizer subsidy has also changed, from an input (gas) 
subsidy to an output (fertilizer price) subsidy. 
 
¶7. (U) Interest spending remains substantial at Rp 85.1 
trillion (USD 9.4 billion) or 11% of the total spending.  Of 
this, domestic interest payments are slated to reach Rp 58.3 
trillion (USD 6.4 billion). 
 
¶8. (SBU) Transfers to regions increase by a nominal 13% in 
the draft 2007 budget to Rp 250.5 trillion (USD 27.6 
billion), or 7.1% of GDP.  The increase includes a 10.4% 
increase in the Revenue Sharing Fund (DBH) to Rp 65.8 
trillion (USD 7.2 billion), and a 12.4% increase in the 
General Allocation Fund (DAU) to Rp 163.7 trillion (USD 18 
billion).  As in previous years, no region will receive less 
than last year, but 2007 will be the last year that the DAU 
will increase consistently for all regions.  Starting in 
2008, the GOI intends to share funds more equitably across 
regions.  Resource-rich regions will have to "transfer their 
surplus" to under-resourced regions. 
 
Other Spending Priorities 
------------------------- 
 
¶9. (U) Other significant spending items in the draft FY 2007 
budget include the following: 
 
--In keeping with SBY's anti-corruption campaign, the draft 
budget increases spending allocations for key anti- 
corruption institutions by 13% in nominal terms. 
 
--The budget proposes increased funds of Rp 150 billion (USD 
16.5 million) in 2007 for disaster early warning systems, up 
from Rp 60 billion (USD 6.6 million) in 2006. 
 
--The budget sets out Rp 2.7 trillion (USD 297 million) of 
rehabilitation and reconstruction funds for earthquake 
damage for Yogyakarta and Central Java under an "other 
expenditures" line item. 
 
--The budget allocates Rp 2 trillion (USD 220 million) for 
emergency reserves or disaster mitigation funds. 
 
 
JAKARTA 00011379  003 OF 005 
 
 
-------------------------------- 
Table 3: FY 2007 Draft Budget 
         Allocations by Ministry (1) 
-------------------------------- 
Ministries/     2006   %     2007             % 
Agencies        (1)  of GDP   (1)    %GDP Increase 
--------------------------------------------- ----- 
 
Social Affairs 
-------------- 
Education       39.5   1.26    43.5   1.23   10.1 
 
Health          14.2   0.46    15.1   0.43    6.3 
 
Religious Aff.  10.6   0.34    10.8   0.31    1.9 
 
BRR (3)         11.5   0.37    10.0   0.28  -13.0 
 
Defense/Security 
---------------- 
Defense         27.0   0.86    31.3   0.89   15.9 
 
National Police 15.9   0.51    18.7   0.53   17.6 
 
Judicial/Anti-Corruption 
------------------------ 
Ministry of 
Justice          3.4   0.11     3.8   0.11   11.8 
 
Supreme Court    2.2   0.07     2.6   0.07   18.2 
 
Attorney General 1.5   0.05     1.6   0.05    6.7 
 
Supreme Audit 
Board            0.6   0.02     0.8   0.02   33.3 
 
Corruption 
Eradication 
Commission (KPK) 0.3   0.01     0.2   0.01  -33.3 
 
Infrastructure 
-------------- 
Public Works    18.3   0.59    21.4   0.61   16.9 
 
Transportation   8.0   0.26     9.5   0.27   18.8 
 
(1) Figures are based on the first draft dated August 16. 
(2) In trillions of rupiah 
(3) In % 
(4) Aceh Rehabilitation and Reconstruction Agency 
 
Higher Tax Revenues Expected 
---------------------------- 
 
¶10. (SBU) Revenues in the 2007 draft budget are expected to 
rise 8% to Rp 713.4 trillion (USD 778.7 billion), leaving a 
projected budget deficit of Rp 33.1 trillion (USD 3.7 
billion), equivalent to 0.9% of GDP.  Tax receipts account 
for approximately 70% of government revenue, and the draft 
2007 budget projects tax revenue at Rp 505.9 trillion (USD 
55.8 billion), or 14.3% of gross domestic product.  This 
assumes that Parliament will enact revisions to three tax 
laws by January 2007, and that improvements in Indonesia's 
tax administration will offset any decline in corporate 
income tax and value-added tax (VAT) revenues.  (Note: The 
draft amendments to the tax laws propose lowering corporate 
income tax rates from 30 to 28% in 2007.)  The GOI also said 
it hopes to accelerate VAT refunds to companies next year 
and has already returned Rp 7.5 trillion (USD 825 million) 
as of August 2006.  One MOF official told us that the 
Director General for Taxation, Darmin Nasution, found the 
2007 tax revenue number too ambitious.  The budget 
realization as of July 2006 shows that non-oil income tax 
increased by 24% and VAT by 26% compared to 2005. 
 
Financing Still Relies on Bonds and Banks 
----------------------------------------- 
 
¶11. (U) With amortizations of foreign loans far exceeding 
new drawings, the GOI will rely on domestic sources to 
finance a projected Rp 33.1 trillion (USD 3.6 billion) 
 
JAKARTA 00011379  004 OF 005 
 
 
deficit.  Of Rp 51.3 trillion (USD 5.6 billion) in domestic 
financing, the GOI expects 67% will come from the issuance 
of government bonds, 31% from the utilization of the 
government's reserve funds in Bank Indonesia, 4% from 
privatization of state firms, and 2% from the sale of assets 
from the banking restructuring programs.  This financing 
pattern is very similar to the 2006 budget.  The government 
plans to issue Rp 69.1 trillion (USD 7.6 billion) in 
government bonds in 2007, of which Rp 48 trillion (USD 5.3 
billion) will be domestic and Rp 18.4 trillion (USD 2 
billion) international. 
 
Privatization and SOE "Equity Injections" 
----------------------------------------- 
 
¶12. (SBU) The GOI anticipates that privatization of SOEs 
will contribute Rp 3.3 trillion (USD 360 million) towards 
financing the FY 2007 budget, slightly up from Rp 3 trillion 
(USD 360 million) in 2006.  The GOI has not announced which 
SOEs it will privatize.  Like the 2006 budget, the FY 2007 
draft budget also includes a specific, Rp 1.3 trillion (USD 
143 million) line item in the financing section of the 
budget entitled "SOE equity injections."  Table 3 shows the 
amounts of GOI bailout funds by SOE. 
 
--------------------------------------------- --- 
TABLE 3: Equity Injections in Indonesian 
         State-owned Enterprises FY 2006-07 
--------------------------------------------- --- 
 
COMPANY              2006(1)            2007(2) 
(INDUSTRY) 
--------------------------------------------- --- 
Garuda 
(airline):           500/55              500/55 
 
Merapati 
(airline):           450/50                -/- 
 
Kertas Leces 
(paper):             300/33              175/19 
 
Pupuk Iskandar Muda 
(fertilizer):        150/16              200/22 
 
Sarana Pengembangan Usaha 
(credit guarantees):   -/-                50/5.5 
 
Boma Bisma Indra 
(industry):            -/-                75/8.2 
 
Perkebunan Nusantara XIV 
(plantation):          -/-               100/11 
 
Industri Kereta Api 
(rolling stock):       -/-               100/11 
 
Kereta Api Indonesia 
(railways):            -/-               100/11 
 
PT Dirgantara Indonesia 
(aircraft):           40/4.4               -/- 
 
Perum PPD 
(bus company):        40/4.4               -/- 
 
 
(1) Figures in Rp billions/USD millions.  From Media 
sources. 
(2) Figures in Rp billions/USD millions.  From GOI FY 2007 
draft budget. 
 
Three-Year Budgets? 
------------------- 
 
¶13. (U) As outlined in State Finance Law No. 17/2003, the 
GOI hopes to move to a three-year rolling budget program 
from the current annual budget exercise.  Although the MOF 
and National Planning Ministry (BAPPENAS) have urged 
ministries to plan programs for the medium-term (2-5 years), 
the GOI hopes to begin actual implementation of multi-year 
 
JAKARTA 00011379  005 OF 005 
 
 
budgets starting in 2008.  Some ministries have already 
begun planning along these lines.  This should allow more 
flexibility to carry over unused spending from one year to 
the next without requiring parliamentary approval. 
 
--------------------------------------------- ------ 
Table 4: FY 2006 Budget and FY 2007 Budget 
--------------------------------------------- ------ 
                           FY 2006        FY 2007 
Items (1)                Rp      % of    Rp    % of 
                        Trill    GDP   Trill   GDP 
--------------------------------------------- ------ 
¶A. Total revenue         659.1  21.1   713.4   20.2 
¶I. Domestic revenues     654.8  21.0   710.8   20.1 
 Tax revenues            425.0  13.6   505.9   14.3 
  Domestic taxes         410.2  13.2   490.2   13.9 
   Income tax            213.7   6.9   257.3    7.3 
   ¶1.   Oil and gas         38.7   1.2    39.2    1.1 
   ¶2.   Non oil/gas        175.0   5.6   218.2    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    15.6    0.4 
 
Non-tax revenues         229.8   7.4   204.9    5.8 
  Natural resources      165.7   5.3   151.6    4.3 
  SOE profits             22.3   0.7    16.2    0.5 
  Other                   41.8   1.3    37.1    1.1 
 
II. Grants                 4.2   0.1     2.7    0.1 
 
¶B. Expenditures          699.1  22.4   746.5   21.1 
 Central govt. exp.      478.2  15.3   496.0   14.0 
  Routine                135.3   4.3   171.0    4.9 
  -Personnel              79.2   2.5    98.5    2.8 
  -Material exp.          56.1   1.8    72.5    2.1 
  Capital exp.            69.5   2.2    66.1    1.9 
  Interest payments       82.5   2.6    85.1    2.4 
  Subsidies              107.6   3.5   109.7    3.1 
  Social assistance       41.0   1.3    49.0    1.4 
  Other current exp.      42.3   1.4    15.1    0.4 
 
 Transfer to regions     220.8   7.1   250.5    7.1 
 
--------------------------------------------- ------ 
Primary balance           42.5   1.4    52.0    1.5 
--------------------------------------------- ------ 
Overall balance          (40.0) (1.3)  (33.1)  (0.9) 
--------------------------------------------- ------ 
Financing                 40.0   1.3    33.1    0.9 
 Domestic financing       55.3   1.8    51.3    1.5 
  Domestic banks          17.9   0.6    16.1    0.5 
  Privatization            1.0   0.1     3.3    0.1 
  Assets restructuring     2.6   0.1     1.0    0.0 
  Govt debt               35.7   1.1    34.2    1.0 
 Foreign financing (net) (15.3) (0.5)  (18.2)  (0.5) 
  Gross drawing           37.5   1.2    35.9    1.0 
   Program loan           12.1   0.4    14.4    0.4 
   Project loan           25.5   0.8    21.5    0.6 
  Amortization of 
  foreign debt (net)     (52.8) (1.7)  (54.1)  (1.5) 
 
(1) Column totals may not add perfectly due to rounding. 
 
PASCOE