Budget 2015: Indonesia's revised fiscal plan envisages substantial rise in infrastructure spending, but implementation constraints remain

The Indonesian government on 9 January 2015 submitted a revised 2015 State Budget to parliament for approval. The draft budget updates the 2015 State Budget approved by parliament in September 2014 during the last weeks of the previous administration of President Susilo Bambang Yudhoyono. It is being debated and expected to be voted on by 18 February when the current session of parliament ends. The draft budget is significant, as it is the first one proposed by President Joko Widodo since he assumed office on 20 October 2014, therefore providing an indication of his policy priorities.

After increasing petrol and diesel prices by over 30% in November 2014, Joko abolished petrol subsidies altogether and capped diesel subsidies to IDR1,000 (USD0.08) per litre from 1 January 2015. This has drastically reduced the government's fuel subsidy allocation from IDR276 trillion in the 2015 state budget to IDR81 trillion in the revised draft 2015 state budget, approximately IDR100 trillion of which has been allotted to increase infrastructure spending. In total, the draft fiscal plan allocates IDR281.1 trillion to infrastructure spending. Indonesia's low infrastructure spending, compared with countries such as India and China, was approximately 4% of GDP over the past decade, according to the World Bank, and has been a major constraint in the country's effort to accelerate its economic growth.

The Ministry of Public Works and People's Housing has been allocated the biggest portion of the infrastructure budget at IDR119.388 trillion – an increase of around IDR34 trillion from the original 2015 fiscal plan. These funds will be used among other things to finance toll roads, as well as build access roads to the ports of Tanjung Priok in Jakarta, Kuala Tanjung in North Sumatra, Maloy in East Kalimantan, and Sorong in Papua.

The revised budget targets reflect recent developments, including the obvious revenue/expenditure impact from lower oil prices and the inflation impact of the fuel subsidy elimination. Following discussions with parliament's finance and banking committees on 26 January 2015, the government agreed to lower the growth target to 5.7% and change the IDR:USD exchange-rate assumption to 12,500. The assumptions are broadly reasonable, with the exception of the growth target, which IHS considers to be overly optimistic. Rather than the 5.7% revised budgetary target, we expect the economy to grow by only 5.1% in 2015. Such an ambitious growth target is typical in Indonesia's budgetary process and does not threaten the budget deficit outcome, which often comes below target due to bottlenecks in expenditure implementation.

Parliament likely to pass budget

The draft budget was submitted to parliament as relations have improved between the minority parliamentary bloc allied to Joko and the majority bloc allied to the defeated presidential candidate, Prabowo Subianto. In November 2014, opposition figures, including the deputy speaker of parliament, Fadli Zon, threatened to reject any revised budget in a dispute over leadership positions in the legislature. In an indication of the improved ties, Joko met to discuss the draft fiscal plan with the leader of the Golkar party, Aburizal Bakrie, the largest party in the opposition bloc, on 13 January, after which Aburizal said he would help with the negotiations in parliament. Golkar's pledge of support is likely to be connected to the government's decision to allocate funds to settle compensation claims by thousands of residents against a Bakrie Group company over a mud volcano disaster in 2006. The funding for the compensation claims would address a long-standing issue that has adversely affected Aburizal's personal popularity. Golkar's support suggests that the budget will be passed with minor amendments, for instance with greater credit allocation for small companies, as has been demanded by Golkar leaders.

Budget implementation issues

Supporting Joko's budget proposal, Indonesia has also been taking steps since 2012 to resolve the lengthy and costly process of acquiring land for infrastructure projects. Regulations, which set a clear timeframe and mechanism to settle land acquisition disputes for infrastructure projects in the public's interest, came into full effect from 1 January 2015; although those have yet to be tested. One notable project that is likely to be positively affected is the USD3.2-billion 2-GW coal-fired power plant in Batang, the construction of which has been delayed since 2012 because of outstanding land acquisition issues. The clearest indicator that the government has resolved the land acquisition problem would be the ground-breaking projects such as the Batang power plant.

Outlook and implications

If passed, which seems probable, the revised 2015 budget represents a significant increase in government spending on infrastructure at a level that it has been unable to provide in recent years, because of large fuel-subsidy outlays. Furthermore, the introduction of a fixed per-litre subsidy level for diesel from 1 January should provide the government with better control over budget expenditure against future oil price increases. Nevertheless, despite improvements in the regulatory environment, ongoing land acquisition problems will probably remain a key operational issue for many infrastructure projects in the12-month outlook.

This budget carries at least as large a political significance as it does economic. The budget's approval would demonstrate cross-party support for Joko's infrastructure programmes and provides him with a mandate moving forward to introduce additional programmes in line with these policy goals. In fact, the most salient economic outcomes have already occurred: approximately USD18 billion has been freed up from the nearly complete elimination of fuel subsidies, which Joko has delivered. The significance of this should not be underestimated: it gets to the bottom of Indonesia's dual challenge of poor infrastructure and a lack of financing to improve it. We assess it will take at least another year to see a meaningful impact on growth from the budget, but these policy changes have the ability to add between 0.5 and 1.0 percentage point annually to Indonesia's growth over the medium term.