Budget Cutting is the Right Choice

A number of market players supported the Finance Minister Sri Mulyani for cutting the government expenditure in APBN 2016 worth 133.8 trillion IDR. This action shows that the government prefers to be disciplined on budgeting although there is a risk of a drop in GDP due to a change in consumer contribution with this policy.

The reason why Sri Mulyani cut the government expenditure is because the realization of tax revenue will miss the 1.539 trillion IDR target in 2016 State Budget by 219 trillion IDR. Budget Ministry/ Institution were trimmed by 65 trillion IDR while the domestic funds transfer was reduced to 68.8 trillion IDR. Although the budget had lowered, the budget deficit will widen to 2.5% compared to the previous target of 2.35%.

John D Rachmat, Head of Equity Research & Strategy Mandiri Sekuritas, considered Sri Mulyani’s action for being disciplined on budgeting will give a positive impact to Jakarta Composite Index (JCI) for increasing the market player trusts to the government. Mandiri Sekuritas predicts JCI will reach 5.450 by the end of this year. “2017 State Budget Plan that is going to be announced by end of August 2016 will become the nearest test for Sri Mulyani to show discipline on budget determined,” said John.

Patricia Sumampouw, an Analyst from CIMB Securities, said that the budget cut worked according to CIMB’s first scenario that predicted a tax ratio of 10.4% or deflation of revenue to 220 trillion IDR and deflation of infrastructure budgetary by 3%. Until June 2016, the budget deficit had reached 231 trillion IDR or 1.8% of GDP with deflation of revenue by 12% or 219 trillion IDR. “The assignation of Sri Mulyani as the Ministry of Finance will increase the public trusts to the government for the next of couple years,” said her.

Statistic Indonesia (BPS) announced that Indonesia’s GDP grew on the second term of 2016 by 5.08% of year-on-year exceeding the market consensus by 5.0% of year-on-year. Suryamin, the Head of BPS, said that the household consumption gave the largest contribution for economic growth because it was supported by the thirteenth salaries and the fourtheenth PNS that were used for the preparation of Eid Mubarak holiday and the new school year. The household consumption on the second quarter of 2016 grew by 5.04%, the government consumption by 6.28%, Consumption index by 6.72%, and Gross Fixed Capital Formation by 5.06%. (*)