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Economy

Indrawati chops $10bn from Indonesia's budget

Indonesian Finance Minister Sri Mulyani Indrawati poses for selfies with well-wishers at the World Islamic Economic Forum in Jakarta on August 4 (Photo: Simon Roughneen)

JAKARTA -- Sri Mulyani Indrawati, Indonesia's new finance minister, said on Wednesday that 133.8 trillion rupiah ($10 billion) will be cut from government spending this year in anticipation of a widening shortfall in tax revenue.

The former World Bank Group managing director, who also served as finance minister from 2005 to 2010, was brought back into cabinet a week ago.

"The President's theme is strengthening credibility, confidence, and trust," Indrawati told reporters on Aug. 3 following a meeting with President Joko Widodo and his economic ministers.

A day later, speaking to reporters at the World Islamic Economic Forum in Jakarta, Indrawati said the finance ministry should use "all tools to improve the business climate".

"Job creation is not coming from the government -- it is from the private sector," the minister said.

After setting an ambitious tax revenue target for 2015, the government has slapped on higher import tariffs and threatened to squeeze foreign firms. This has raised questions about its commitment to improving the business climate through tax incentives and other measures. The concerns have continued as the finance ministry missed revenue targets by wide margins.

Indrawati said the budget revision reflects the "realities" of a sluggish global economy pushing down commodity prices and trade. As a result, revenue assumptions in the 2016 budget, which was only revised about a month ago, were still too optimistic.

According to the minister, the revenue shortfall will be about 219 trillion rupiah ($16.6 billion). This can be partly absorbed by trimming 65 trillion rupiah in administrative costs, such as meetings, and another 68.8 trillion rupiah from transfers to regional governments.

Widodo immediately lent his support to the proposals. Talking on Thursday morning, he named 10 regional governments with the most deposits in banks, and threatened to cut further funding in the absence of prompt disbursement. "Regions don't have strength in the private sector," he said. "So it is important to immediately spend."

The budget cuts are "realistic" due to the inevitable shortage in tax revenue, said Yustinus Prastowo, executive director at the Center for Indonesia Taxation Analysis. "There is no option for us but to cut spending."

To cover a shortfall, the government recently introduced a tax amnesty program which offers low tax rates for individuals who declare or repatriate money kept offshore. However, the government's 165 trillion rupiah target for proceeds was widely viewed as optimistic.

Indrawati backs the amnesty, describing Indonesia's tax base as "very weak" and increased revenue as vital for infrastructure expansion. 'We will make sure the infrastructure financing is there -- this will be the highest priority," she said.

The budget cuts are the first effort by Indrawati to lift business sentiment, which is crucial given the government's reliance on the private sector to fund a big chunk of its 5,400-trillion rupiah infrastructure development plans.

Nikkei staff writer Erwida Maulia contributed to this story.

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