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Indonesia's Widodo unveils populist 2019 budget ahead of election

Dole-out measures favored over infrastructure spendings

Indonesian President Joko Widodo deliver a speech at the parliament in Jakarta on Aug. 16.   © Reuters

JAKARTA -- Indonesian President Joko Widodo's draft state budget for 2019 promises a raft of dole-outs as he prepares to do battle for a second term in next year's presidential election.

The draft, presented by the president on Thursday, included increases in subsidies as well as civil servants' pay, and a doubling of benefits to poor households. These moves -- which Widodo was quick to stress were aimed at achieving equitable growth -- are a not-so-subtle attempt to win over voters ahead of the election in April, where he will face Prabowo Subianto, a former military general, who plans to campaign on populist policies.

"In 2019, the government will continue its measured expansionary fiscal policy, in order to encourage a sustainable and equitable economy for all Indonesians," the president said. "The government will encourage economic growth in the range of 5.3%. This growth will be more just and equitable, by encouraging faster growth in eastern Indonesia, border areas and other areas that are still lagging behind."

For energy-related subsidies next year, the government has earmarked 156.5 trillion rupiah ($11 billion), an increase of 65.6% compared to the 2018 budget. Non-energy subsidies such as for fertilizers in agriculture will be 64.3 trillion rupiah, a more moderate increase of 4.2%.

The archipelago nation imports most of its fuel from abroad. With the government fixing prices of regular gasoline and diesel, the state-owned oil and gas giant Pertamina is suffering amid the falling currency and higher oil prices. Allowing Pertamina to raise prices of gasoline would have been political suicide for the president, so he had little choice but to increase the subsidies to keep prices low.

Jokowi, as the president is known, also outlined plans to increase civil servants' and retirees' basic salaries and pensions by 5% on average, as well as doubling benefits to the 10 million poor families currently included under a government aid program to more than 30 trillion rupiah.

The increase in handouts hit the budget for infrastructure hard. Despite the vast infrastructure needs of the archipelago nation, the budget totaled 420.5 trillion, a mere 2.4% increase from the current year. This is the slowest growth in infrastructure budget since Widodo took office in 2014.

The stalled infrastructure spending is also in line with the government's moves to support the tumbling rupiah. Jokowi is cutting back on infrastructure projects to curb imports of capital goods produced overseas. Finance Minister Sri Mulyani Indrawati said earlier this week that projects by Pertamina and state utility PLN in particular will come under scrutiny. Those with high import content and which have not reached financial closing will be delayed.

The government's forecast for the rupiah was set at 14,400 to the dollar, around 1.3% higher than the current rate.

These measures are set to take government expenditures for next year to 2.4 quadrillion rupiah, up 9.8% from the outlook based on the current 2018 budget. This will be backed by a 13% increase in state revenue, aimed to reach 2.1 quadrillion rupiah and limiting the budget deficit to 1.84% of gross domestic product. By Indonesian law, the combined budget deficit of the central and regional governments is not allowed to exceed 3% of GDP in any given year.

The revenue target is in part based on assumptions that the government will be able to increase its tax revenue -- 1.7 quadrillion rupiah next year, up from the 2018 target of 1.6 quadrillion rupiah -- and it remains to be seen whether it can achieve the target.

Jokowi said in his speech that the government was planning to increase tax revenue through "encouraging increased compliance through more simple and transparent tax administration reforms," but Indonesia's tax revenue almost always falls short of its target. The government was able to gather only around 90% of the target in 2017, while tax revenues for this year to July total 780 trillion rupiah, only 48.2% of the 2018 target.

The draft budget still needs to be approved by lawmakers, a process that usually takes several months.

Nikkei staff writers Erwida Maulia and Bobby Nugroho in Jakarta contributed to this report.

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