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Indonesia Selected Issues of Public Resource Management

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Indonesia Selected Issues of Public Resource Management Report No. 70017e Indonesia SelectedIssues of PublicResource Management Mach 11,1988 Public Disclosure Authorized CountryDepartment V AsiaRegion FOR OFFICIAL USE ONLY ,. .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I Public Disclosure Authorized , N C Public Disclosure Authorized - .,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- 4~~ ~ ~~~~~~~~-Ž/ Documet of th .rld Bank Thisdocument has a res'tricteddistribution and may be used by recipient Public Disclosure Authorized onlyin the performanceof theirofficia duties. Its contents may not othewise bedisclosed wMitout Vi%bdd Bank authorization. CURRENCY EQUIVALENTS Before November 15, 1978 US$1.00 = Rp.,415 Annual Average 1979-86 1979 US$1.00 = Rp. 623 1980 US$1.00 - Rp. 627 19dl US$1.00 = Rp. 632 1982 US$1.00 = Rp. 661 1983 US$1.00 = Rp. 909 1984 US$1.00 = Rp. 1,026 /a 1985 US$1.00 = Rp. 1,111 1986 US$1.00 = Rp. 1,283 /b 1987 US$1.00 = Rp. 1,644 March 10, 1988 US$1.00 = Rp. 1,660 FISCAL YEAR Government - April 1 to March 31 Bank Indonesia - April 1 to March 31 State Banks - January 1 to December 31 /a On March 30, 1983 the Rupiah was devalued from US$1.00 = Rp. 703 to US$1.00 = Rp. 970 /b On September12, 1986 the Rupiah was devalued from US$1.00 = Rp. 1,134 to US$1.00 = Rp. 1,644 1O1 OFFICIALUeK ONLY TITLE : Indonesia: Selected Issues of Public Resource Kanagement COUNTRY s Indonesia REGION s Asia SECTOt s Country Economic RBPORT TYPE CLASSIFICATION Mm/yy LANGUAGE 7007-IND ERA Official Use 3188 English PUBDATE MMarch 1988 ABSTRACT s The Report reviews the macroeconomicadjustment process of the Indonesianeconomy over the last decade and the role that public resource managementhas played in it. It then focuses on three key areas of public resource management: non-oil taxes, local governmentfinances and operations and maintenance(OM) expenditures. The work on the non- oil tax system analyses the nee. and the means by which the Governmentshould partiallyreplace lost oil revenues. It (a) assesses the implementationof the tax reform; (b) analyzes the revenue potentialof the present tax system and the policy measures needed t. achieve it; and (c) reviews a selectednumber of taxation issues that are relevant to the consolidationand improvementof the new tax system. The work on local governmentfinances (a) examines the structureand evolutionof local governmentrevenue; (b) assesses the role of central transfers,local resource mobilizationand loan finance; and (c) evaluatespossible changes in financingpatterns of local governmentsand the appropriatestrategy for achievingthese changes. Finally, the Report (a) assesses the importanceand magnitude of the 04M problem in Indonesia;(b) ascertainsthe main weaknessesin the planningand budgetingprocess that lead to inadequate outlays for 0&M; (c) determinesthe main institutional constraintsfor adequate and efficientO0M; and (d) defines the necessary strategy and policy measures that are required to address the problem. Thisdocument has a retd distibutind may bewd byrecintsony in the pefomnue ofth offcldutis. Its contents maynt othrsbebe dicked wihout Wodd BankauthrkiztIn INDONESIA SELECTED ISSUES OF PUBLIC RESOURCE MANAGEMENT Table of Contents Page No. SUMKARY AND CONCLUSIONS............................................. viii-xv CHAPTER I. THE ROLE OF PUBLIC RESOURCE MANAGEMENTIN THE INDONESIAN ECONOMY e................................... 1 A. Introduction........... .......... I...................1 Major Challenges in Public Resource Management...... 3 B. Macroeconomic Adjustment and the Role of Government, 1978-86 ...... @ 7..........7 The Second Oil Shock, 1978-81....................... 8 Adjustment in the Downturn, 1982-85................. 9 The New Adjustment Challenge, 1986-87............... 11 C. Government Revenue and Expenditure Trends: An Oeve 13 ...., ...... Government Revenue.................................. 13 Government Expenditure........................ ... ... 16 This Report was prepared by a team led by Ernesto May (Country Operations Division). Willem van Eeghen (Young Professionals Program) and Mukul Asher (Consultant) contributed a background paper for Chapter II. Jaime Biderman (Urban and Water Supply Division), James Alm and Brian Binder (Consultants) were responsible for the background paper for Chapter III. And Peter Heller (IMF# Government Expenditure Analysis Division) and Theodore Smith (Consultant) contributed the background paper for Chapter.IV. Other contributions were made by Robert Calderisi and Amar Bhattacharya (Country Operations Division), Paul Stott (Urban and Water Supply Division) and Steen Jorgensen (Young Professionals Program), Arif Zulfiqar, Peter Sun and Sushma Ganguly (Agriculture 4 Division), Nicholas Prescott (Population, Health and Nutrition Division II) and Mark Wheeler (Consultant), Sigfus Sigfusson (Transportation Division), and Cecilia Valdivieso (Education Division). The extensive assistance provided by the Ministry of Finance, BAPPENAS, and the Central Bureau of Statistics is gratefully acknowledged. A draft of the Report was discussed with the Government in January/February 1988. - ii - Page No. CHAPTERII. MON-OILTAX SYS..M .... ........... 21 A. The Tax Reform................................. 21 B. Enforcementof the Tax Systema....................... 25 The Case for Enforc nt................................... 25 Indicatorsof Low Compliance......................26 Potential Tax Revenues. .-.*..... ........ ........... 29 RevenueProjections With and WithoutEnforcement.. 32 Reco _ ndations ...... ee....... ******oo* 37 Co Selected Tax Issues... 38 Indexationof Deductionsand Thresholdsfor MarginalTax Rates ........ 39 Extension of VAT 41 Tax Treatmentof In t e r e s t 41 Suspensionof VAT on CapitalGoodsoo ds............43 VAT Borneby the Government..............e.rn...n 45 Treatmentof IncomeDerived from Foreign-Aid Projectsoo*oooo*oo******eo*o 45 Reo cmmdationsooooooooooommentati*eo ns*****o*oooo46 CHAPTER III* LOCAL GOVERNMENTFINANC ........ 47 A Inn...I nr ou. ci o 47 Structureand Role of LocalGovernments........... 47 LocalGovernments: Consolidated Expenditures and Sourcesof Finamcing..a n c i ng....................48 B. The Role of CentralTransfersansfers................ 52 Structureand Evoluitionof the GrantSysteme...... 52 The GrantSystem: Problemsand Issues************ 55 Reformof the GrantSytt e m 56 C. The Role of PropertyTaao. i o. 57 Reformof IPEDA: PBB......... 58 RevenuePotential of the PBB.... 60 r. LocalGovernment Taxes.... .................... 63 LevelI Taxes.....................................63 Level II .a.es .......................... 64 IncreasingLocal Tax Revenue..................... 65 -iii- Pae No E. Other Sources of Financingfor Local Governments.... 69 User ......... ...................... ........ 69 Loan Finance .......... .... ...... 71 CHAPTER IV. GOVERNMENT EXPENDITURES: A FOCUS ON OPERATIONS AND MAINTENANCEIN INDONESIA. .............. ........ 74 A. nrdcin.......*74 B. The Economicsof Operations and Maintenance*......... 74 C. O&M Problems in Selected Sectors.................... 77 General Sources of the Problem.................... 80 Stctor-SpecificFeatures of OU14................... 84 D. Planning and Budgeting for Oas...................... 88 E. A Strategy for Action............................... 94 APPENDIX 1. Indonesia: Sources and Uses of Funds Framevork........ 100 APPENDIX 2. The Non-Oil Taz System................................. 134 APPENDIX 3. Calculationof the TheoreticalPotential Tax Revenue... 152 APPENDIX 4. Local Government Finances: StatisticalAppendir....... 165 APPENDIX 5. The Economicsof Operations and Maintenance............ 189 NAP Text Tables Table No. Chapter I 1.1 Non-Wining GDP Growth Trends in some Oil Exporting Countries, 1967-84................e.e.o.c 2 1.2 Sectoral Savings-InvestmentBalances, 1978-86. -8....e6.e... 10 1.3 InterestRates of Commercial Banks, 198285. 2-850ee...ee.e.c 12 1.4 General GovernmentAccounts, 1978-86 7 8 -8..................614 1.5 Structureof Government Expenditure,1978-86..8-86.......... 17 1.6 PerformanceIndicators of Non-FinancialPublic Enterprises.. 19 Chapter II 2.1 CentralGovernment Non-Oil Tax Revenueg 1978/79-1986187...... 22 2.2 Tax Efforts in Selected Asian Countries, 19868 *.cee*6ee.e 24 - iv - Page No. Table No. 2.3 The 1987/88 Bugt..................................25 2.4 Indonesias Number of TaxpayersRegistered, Personal and Corporate Income Tax, 1984-86............................. 27 2.5 Indonesia: Number of TaxpayersRegistered and Types of Returns Filed for the Value-AddedTax, April 1985 - June 1986................................................8 2.6 1985/86Non-Oil Tax Revenue, Actual and Theoretical PotentialRevenue......................................... 30 2,7 Personal Income Tax 1985/86: DiscrepanciesBetween Actual and TheoreticalPotential Revenue and Taxpayers.... 31 2.8 Estimated 1985/86 TheoreticalPotential Revenues from Various Setr 33 .............................. 2.9 EstimatedNon-Oil Tax Revenue 1986/87-1990/91Without and With Enforcement ........... 35 2.10 Central Government Budget Projections,1987/88-1990/91...... 36 2.11 EstimatedNon-Oil Tax Revenue 1986/87-1990/91Without and With Indexationof Deductions......................... 40 2.12 Extensionof VAT: Estimated Revenue Under Alternative 42 Chapter III 3.3 Provincialand Local GovernmentAccounts, 1978-86........... 49 3.2 Main Sources of Local Government Finances, 1978-86.......... 52 3.3 Grant System, 1979/80-1987/88............................... 54 3.4 Property Tax: Estimated
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