Indonesia's parliament approves ambitious first Widodo budget

JAKARTA (REUTERS) - The Indonesian parliament approved President Joko Widodo's first budget, which cuts the fiscal deficit while lifting infrastructure spending, but analysts doubt some of the numbers will add up.

In shaping revisions to his predecessor's initial 2015 budget in September, Widodo was aided by tumbling oil prices, which let him slash fuel subsidies that traditionally take a major chunk of state spending.

The revised budget, accepted by a parliament in which Widodo does not have a majority, trims total spending from the September one by 2.7 per cent, to 1,984 trillion rupiah (S$194.02 billion).

But the government has increased what it calls "productive"spending and cut the budget deficit to 1.90 per cent from 2.21 per cent in the September plan.

With more than 200 trillion rupiah saved by slashing fuel subsidies, the administration increased infrastructure spending by almost 50 per cent, and hiked budgets including for social security and direct transfer to villages.

The new budget will inject 39.92 trillion rupiah into 35 state-owned firms. The government expected these firms to leverage the capital and use the money to do infrastructure projects.

Some analysts applauded the budget strategy. "The government's commitment to develop infrastructure has been very evident in allocation of capital expenditure," wrote Andry Asmoro of research group Mandiri Institute. Such outlay has nearly doubled, he said, adding "for the first time it exceeds spending on fuel subsidies".

But others are worried that Widodo set the tax revenue target too high at 1,489 trillion rupiah, 7.9 per cent above the September projection.

Tax revenue from Indonesia's oil and gas production will fall significantly from what was expected, and the shortfall could potentially dent plans for infrastructure.

To make up for less oil and gas revenue, Widodo "set an unrealistic target" for other taxes, said Yustinus Prastowo, director of the private Center for Indonesia Taxation Analysis."This is a huge gamble." Deutsche Bank, in a Thursday note, called Indonesia's tax revenue projections "unrealistic given the macro-environment".

It said this year's budget deficit might be only 1.7 percent, below Widodo's target, but that reflected its doubts the government has the ability to push through higher spending allocations for infrastructure and other areas.

Vikram Nehru, an economist at the Carnegie Endowment for International Peace, wrote in Nikkei Asian Review last week that tax authorities' efforts to meet targets "could become overzealous and damage the country's fragile investment climate".