Louise Williams, Jakarta – The Indonesian Government is under strong internal pressure to breach International Monetary Fund (IMF) austerity conditions in this week's national Budget as the deepening economic crisis forces massive lay-offs and spiralling inflation.

The armed forces and the two largest political parties have called on the Soeharto Government to increase spending in tomorrow's Budget, a move which would put Indonesia in breach of the conditions of the country's IMF-led $US38 million ($58 million) bail-out.

Jakarta is expected to deliver a tough Budget, cutting government spending and freezing public sector pay, but big reductions in government earnings from corporate taxes and a huge increase in debt-servicing costs following the depreciation of the rupiah will make it difficult to fulfil the IMF's demand for a surplus budget.

With economic growth closely linked to government spending, the armed forces, the ruling Golkar party and the opposition United Development Party have urged President Soeharto to boost spending by up to 10 per cent to cushion the impact of the crisis.

Two million people have already been laid off, and the armed forces warned last week of destabilisation as more unemployed pour into the streets.

Sri Mulyani, an economist at the University of Indonesia, said an austerity Budget would further contract the shattered economy, which has seen over 60 per cent wiped off the rupiah and more than 40 per cent off the stock-market since mid-1997.

Didi Rachbini, director of the Institute for Development of Economics and Finance, said the Soeharto Government "should not feel obliged" to meet the IMF conditions, which include a Budget in surplus by 1 per cent of GDP, about $US750 million.

Economist say a harsh budget may produce recession, a forecast backed up by the US ratings agency Standard and Poor's, which said Indonesia could expect a 5 per cent fall in GDP for 1998.

The price of rice in Jakarta rose by 9 per cent last week and cooking oil and onions jumped by 64 per cent.

The IMF package has failed to stabilise the economy, and confidence remains low due to fears over Mr Soeharto's health and the absence of any clear political successor.