Indonesia's Widodo sees 'fiscal cliff' risk due to revenue shortfall

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JAKARTA (Oct 15): Indonesia faces a $6.15 billion tax revenue shortfall this year, a finance ministry document shows, raising concerns that the fiscal deficit could bust a legal limit, and place president-elect Joko Widodo into an early budget and political crisis.

Widodo, popularly known as "Jokowi", takes office next Monday knowing that he has to act swiftly to boost revenue collection and cut spending to ensure the deficit does not breach 3 percent of gross domestic product.

"Jokowi is pragmatic. When he saw the (fiscal) data, he thought there is this 'fiscal cliff' in front of our eyes," said an economic adviser to the president-elect, who declined to be named because he was not authorized to speak to the media.

Officials, however, say they are confident that reduced spending will help avoid the deficit breaking the legal limit.

"We have proven all the time that we always manage to keep the deficit below 3 percent," Askolani, the finance ministry's director general of budgeting, told Reuters.

Breaking the budget law could feasibly embolden the opposition to launch an impeachment bid, even though the budget mess is the responsibility of outgoing president Susilo Bambang Yudhoyono.

Making matters more tricky, Widodo faces a hostile parliament with the opposition, led by losing presidential candidate Prabowo Subianto, controlling the majority, though it lacks the two-thirds needed to carry an impeachment vote.

"It is stated in the constitution that if a government breaks a law, it can be impeached," said David Sumual, lead economist at Jakarta-based Bank Central Asia. "But it still depends on the parliament's interpretation of seeing this."

Parliament passed a law in 2003 restricting the budget deficit to below 3 percent of GDP in an effort to prevent a repeat of the financial crisis of 1998 that brought down the 32-year rule of autocratic leader Suharto.

A big question is whether the incoming president would swiftly order an increase in administered oil prices, needed to cut a huge subsidy bill.

Elected in July, Widodo had hoped a politically unpopular fuel price hike would be imposed before he took the reins, but President Yudhoyono denied the president-elect's request in August.

The 2014 budget had assumed a 2.4 percent deficit, but the revenue shortfall and the slowest economic growth in five years has spoilt budget forecasts.

The government is expected to see a tax revenue shortfall of 75 trillion rupiah ($6.15 billion) this year, according to the finance ministry's unpublished 2014 budget revenue outlook, a copy of which was obtained by Reuters.

Finance ministry officials confirmed that they expected a shortfall but declined to comment specifically on the undated report, which showed revenues through August.

HELPED BY FALLING OIL

Assuming no other changes to the budget, the shortfall would push Indonesia's deficit to 316.7 trillion rupiah or 3.15 percent of GDP, according to Reuters' calculations, breaking the budget law.

Officials, however, were confident that would not happen, but a slowing economy is making it more difficult.

The 2014 budget had assumed economic growth of 5.5 percent this year, but the most recent forecast from the central bank is for growth of 5.15 percent.

As of August, the government had spent only 55.9 percent of its allotted spending. But disbursement usually picks up in the last two months of the year.

Helpfully, world oil prices have come down from a peak close to $116 per barrel in mid-June to under $85 on Wednesday, taking some pressure off the oil subsidy bill and raising hopes that the average price for this year will be below the budget assumption of $105.

Those benefits will be offset somewhat by a weaker-than-expected rupiah currency.

Aside from the possibility of Widodo raising oil prices to lower the subsidy bill and stepping up year-end revenue collection, the finance ministry recently sent out letters telling government agencies to reduce spending, particularly for business trips and meetings.

"Realistically it is difficult to get more revenue in two months," Widodo's adviser said. "But there's hope that the new government effect will help improve trust and expectations of tax payers."

The government will not know the size of the 2014 budget deficit until January.

(1 US dollar = 12,196 rupiah)