Social Assistance Spending - the Populist Approach

It is a common phenomenon to see the incumbent Indonesian government becoming more generous in terms of social assistance spending (and energy subsidy spending) in election years. This is an obvious strategy to gain popularity, thus securing more votes in the election.

The Widodo administration also uses this tactic (albeit ministers deny this statement). Considering the 2019 elections are to be held coming April, the cabinet proposed a 32.8 percent year-on-year (y/y) increase to IDR 381 trillion (approx. USD $26 billion) in social spending. These funds are to be spent on various programs, including the Family Hope program (Program Keluarga Harapan), the National Health Insurance program (Jaminan Kesehatan Nasional, or JKN), and the Small Business Credit program (Kredit Usaha Rakyat, or KUR).

Indonesian Finance Minister Sri Mulyani Indrawati commented saying that social assistance programs aim to support the 40 percent poorest households in Indonesia. This should contribute significantly to push the nation's poverty rate down to the range of 8.5 - 9.5 percent. The rising amount of social assistance spending is required because more people will be covered by such programs. For example, the number of people eligible to receive assistance from the Non-Cash Food Assistance program (Bantuan Pangan Non-Tunai) will be widened from 10 million households to 15.6 million households.

Despite sharply rising spending on social assistance programs in the 2019 budget (in an effort to strengthen Indonesia's human capital), the central government does add some funds to its infrastructure development budget as well (although the rise is not as impressive as in preceding years). Still, infrastructure development remains a clear priority for the Widodo administration. For 2019, infrastructure development budget is proposed to be raised by 2.4 percent (y/y) to IDR 420.5 trillion (approx. USD $28.8 billion). Considering total government spending is proposed at IDR 2,439.7 trillion in the 2019 state budget, it implies that 17.2 percent of total government spending would go to infrastructure development, followed by 15.6 percent to social assistance spending.

Meanwhile, in an effort to boost the welfare and enthusiasm of public servants, the government proposes a 5 percent rise in the basic salary and basic pension for civil servants. It would be the first time since 2015 that civil servants' wages rise. A positive side effect would be that civil servants will consume more products and services, thus impacting positively on overall household consumption in Indonesia.

2018 State Budget versus 2019 State Budget:

  State Budget
       2018
State Budget
       2019
Growth
  
(%)
Government Revenue
(in IDR trillion)
    1,903.03     2,142.52 12.58%
Government Spending
(in IDR trillion)
    2,217.25     2,439.69 10.03%
Village Funds
(in IDR trillion)
       60.0        73.0 21.67%
Health Budget
(in IDR trillion)
      107.4       122.0 13.59%
Education Budget
(in IDR trillion)
      434.6       487.9 12.26%
Social Protection Budget
(in IDR trillion)
      287.0       381.0 32.75%

Source: Finance Ministry

Realistic Macroeconomic Assumptions

The government's proposed macroeconomic assumptions for the 2019 State Budget are considered "realistic". Gross domestic product (GDP) is estimated to rise 5.3 percent (y/y) next year (at the same level as Indonesia Investments' forecast). This is in stark contrast to preceding years when the government had to revise its annual growth targets considerably as these initial targets were set much too high.

Meanwhile, the average rupiah exchange rate is set at IDR 14,400 per US dollar in the 2019 budget, much weaker than the IDR 13,400 per US dollar that was set in the 2018 State Budget, but also much more realistic considering the combination of heavy external pressures and broad-based US dollar strength.

Lastly, the Indonesian government plans to reduce the budget deficit in a bid to reduce fiscal risks amid global financial headwinds. The government targets a IDR 297.2 trillion (approx. USD $20.4 billion) deficit, or 1.84 percent of GDP, in the 2019 State Budget. This would be a considerable decline from IDR 325.9 trillion, or 2.12 percent of GDP, in the 2018 budget.

A more detailed overview will be available in the August 2018 edition of Indonesia Investments' research report.

State Budgets of Indonesia:

  State Budget
       2017
(Realization)
State Budget
       2018
State Budget
       2019
GDP Growth
annual % change
        5.07          5.4          5.3
Inflation
annual % change
        3.61          3.5          3.5
Exchange Rate
IDR/USD
      13,384       13,400       14,400
3-Month Notes
coupon (%)
        4.98          5.2          5.3
Crude Oil Price
in USD per barrel
        51.2          48          70

Source: Finance Ministry

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Poll Indonesia Investments:

Who would you vote for in Indonesia's 2019 presidential election?

Voting possible:  -

Results

  • Joko Widodo (57.6%)
  • Prabowo Subianto (31.9%)
  • No opinion (5.7%)
  • Someone else (4.8%)

Total amount of votes: 16321

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