Politicians may consider President Susilo Bambang Yudhoyono's state budget proposal for 2007 a boring document, devoid of bold fiscal measures and without any frills at all.
But it is precisely the conservative assumptions used in the planned budget that will reassure the market that there are unlikely to be any painful amendments midway through the next fiscal year.
As a communication system for providing signals about spending behavior, prices, priorities, intentions and commitments, the 2007 budget plan reflects adequate public expenditure management.
It will focus spending on sectors directly related to human resource development, the improvement of public service delivery, physical infrastructure as well as good governance through an increase in the salaries of civil servants and members of the armed forces. The budget also will continue fiscal consolidation by cutting the fiscal deficit to 0.9 percent of gross domestic product.
The assumptions on key sectors such as an average rupiah exchange rate of Rp 9,300, an oil price of US$65 a barrel, inflation at 6.5 percent and a benchmark short-term interest rate of 8.5 percent are realistic enough to allow for good fiscal management.
These assumptions are strikingly different from the 2006 budget proposal which had to be revised extensively before it was finally approved by the House of Representatives in late October, 2005.
The 24 percent increase envisaged in income tax receipts is not too optimistic if it is set against the economic growth target of 6.3 percent but on the condition that the taxpayer base should be broadened significantly.
On the other hand, the 8 percent decline projected in non-tax revenues should be welcomed as this means that state companies will no longer be squeezed to allocate a greater portion of their profits for dividend pay out. This policy will thus allow them to reinvest a good portion of their earnings for future growth.
The proposed increase of only 8 percent in total spending to Rp 746.5 trillion (US$80 billion) is conservative enough to signal that the total amount of money the government will spend will be closely aligned to what is affordable over the 2007 fiscal year.
The central government will account for more than 66 percent of the planned total spending and regional administrations for the remainder. But the real significance of the central government's spending will not be as high as the nominal sum indicates because more than half of that amount will be spent on debt servicing and fuel and electricity subsidies.
Even though total government debt ratio against gross domestic product has fallen sharply to 41 percent this year, the rigors of debt will still be a big burden on next year's budget.
Domestic and foreign debt servicing (including amortization) will account for almost 19 percent of total spending. No wonder, the official capital account will still suffer a net resource outflow next year. But this burdensome payment will further reduce the government debt ratio to a mere 37 percent later next year, making the debt burden much more sustainable and reducing the country's sovereign risks.
The government wisely decided to avoid the risk of further turbulence of inflationary pressure and instead opted to increase fuel and electricity subsidies to Rp 109.7 trillion or almost 15 percent of the planned total spending.
Even though the budget allocates Rp 138 trillion for the procurement of services and goods, including capital goods, the overall impact of the 2007 state budget will still be contractive on the economy because of the stepped up tax-collection effort and bigger spending on subsidies and debt servicing.
Hence, private investment and exports should expand significantly to become the locomotive of economic growth. New investment will most likely run at a much higher pace because the high degree of predictability provided by the more realistic budget plan will allow for efficient and effective implementation of policies and programs.
A budget system, however capable, is not self-contained, it does not operate in a vacuum, as it will be adversely affected by multiple, converging uncertainties, entrenched patterns of expenditure, inflation and structural imbalances between expectations and resources.
The proposed 2007 budget seems to be designed to cope with these realities.