BUDGET REFORMS

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BUDGET REFORMS
IN INDONESIA
Pointers of a Keynote Speech to be delivered
by Minister of Finance at an International
Conference on Budgeting for Performances
Modernizing Public Financial Management in
Indonesia
Jakarta, May 26, 2008
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BACKGROUND

• To achieve the nation goals of increasing
  peoples welfare, it is necessary to establish a
  sound and stable economy
• The most essential effort in setting up a robust
  economy is by implementing credible budget.
• Credible budget needs suitable planning that
  guide budget policy to achieve the national
  goals.
• Thus, planning and budgeting system plays
  significant role in determining the success of
  government policy performance
• However, the existing planning and budgeting
  system has been out of date and incapable of
  ruling the whole aspects of public finance
  management as expected by constitution
• Budget reform is a must.

DOES THE EXISTING BUDGET SYSTEM PROVIDE OPTIMUM
PERFORMANCE ?
IS IT NECESSARY TO REFORM THE BUDGET PLANNING
SYSTEM TO MEET EXPECTED PERFORMACE ?
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WHAT CIRCUMSTANCES GENERATE BUDGET REFORM ?
1) The willingness to change the Indonesian
Public Finance Law inherited from Colonial
Administration

• The existing Indonesian Treasury Law has been out
  of date and incapable of ruling the whole aspects
  of public finance management
• The changing of the old Public Finance law to
  the new one, can strengthen the implementation of
  checks and balances budget preparation process.

• The awareness of having dual budget
  classification causes inefficiency.

• Dual budget classification creates ambiguity and
  eventually causes duplication and distortion on
  activity resource allocationneeds unification
• GFS system which provides single table of account
  prevents the creation of ambiguous activity
  resulting from distortion on resource allocation
  as well as duplication on budget allocation.

3) Strong demand to implement good governance

• Demand to implement good governance necessitates
  reform on budget management.
• To assure the implementation of good governance
  in the budget operation, the budget should be
  managed in discipline, sustainable, transparent,
  efficient, and accountable manner.

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LEGAL ASPECT OF THE BUDGET REFORM

• The reform has now been underway . . .
• The new laws and regulations on public finance,
  treasury, and
• planning which have been ratified and
  performed as legal basic
• for implementing new budget system include

• Law No 17 / 2003 on Public Finance
• Law No 1 / 2004 on Treasury
• Law No 15 / 2004 on Auditing of Public Finance
  Account
• Law No 25 / 2004 on National Development Planning
• Regulation No 20 / 2004 on Government Work Plan
• Regulation No 21 / 2004 on Line Ministry and
  Agency Budget Work Plan.

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The Law No 17/2003 implies budget reform
is implemented by means of Unified Budget,
Medium Terms Expenditure Framework, and
Performance Based Budgeting Approach
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WHAT ARE THE OBJECTIVES OF THE REFORM ?

• To assure checks and balances in the budget
  process

• The principle of checks and balances in the
  budget process implies equal role between the
  government and the parliament in determining the
  budget.
• The present of Law No 17/2003 which regulates the
  rule above gives the assurance on the
  implementation of checks and balances in budget
  preparation.

• To raise self confidence by replacing traditional
  Indonesian Treasury Law with new Public Finance
  Laws

• Long lasting implementation of traditional
  Indonesian Treasury Law may delegitimate national
  confidence and dignity.
• The ratification of Public Finance Law Year 2003,
  therefore, becomes the starting point to raise
  self confidence and national dignity.

• To improve the quality of decision making process
  on budget allocation and hold budget users
  accountable for outputs /outcomes through the
  utilization of performance information
• In broad sense, the objective of reform is to
  establish credible and sustainable budget, which
  apparently determines the performance of the
  economy

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HOW TO IMPLEMENT REFORM ?
The reform involves the transformation of
traditional budgeting to performance budgeting
which hypothetically can be outlined as follows

Value for money
Economically efficient
effectiveness
Technically efficient
economy
COST
PROCESS
OUTPUTS
OUTCOMES
INPUTS
traditional budgets
output focus budget
outcomes based budget
Performance budgeting
Shifting the direction by means of
Implementing Unified budget, performanced based
(oriented) budget and medium term expenditure
framework

• increase checks and balances in budget
  preparation
• awareness of the need of unified programs
  activities
• the demand to implement good governance

GIVEN CIRCUMSTANCES
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THREE KEY ELEMENTS OF THE BUDGET REFORM
1. Unified Budget Approach
2. Performanced Oriented Budget Approach
3. Medium Term Expenditure Framework
Approach
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UNIFIED BUDGET APPROACH
1. Restructuring Programs and Activities within
LM/GA

• Each program should have clear linkage with
  Government Work Plan (RKP)
• Each Unit Organization should have one program
  that reflects its function
• Activities within program could represent both
  functional and sectoral approach
• Activities representing LM/GA functions (Renja
  K/L) provide standardized minimum services which
  tend to be repetitive
• Activities representing government policy as
  mandated by Government Work Plan (RKP) provide
  certain purposes

2. Using GFS Economic Classification as a policy
instrument for budget allocation

• Activities which provide standardized minimum
  services, which tend to be repetitive, will be
  financed by personnel and material expenditures.
• Activities representing government policy, as
  mandated by Government Work Plan (RKP), provide
  certain purposes, will be financed by material,
  capital and social support expenditures
• Note capital expenditure is used to finance
  activities which generate government assets.
• For certain programs and activities, executed by
  LM/GA indirectly, will be financed by subsidy,
  grant, interest and contingency expenditures.

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• Flow chart The Implementation of Unified Budget

GFS CLASSIFICATION
ORGANIZATION
ECONOMIC
FUNCTION
LM/GA WP (FUNCTIONAL APPROACH)
LM/GA PROGRAMS/ACTIVITIES PROVIDE MINIMUM
SERVICES (recurrent/repetitive/non discretionary)

• PERSONNEL
• MATERIAL
• CAPITAL
• SOCIAL SUPPORT
• SUBSIDY
• GRANT
• INTEREST
• CONTINGENCY

ALLOCATED DIRECTLY TO LM/GA
PUBLIC POLICIES
UNIFIED BUDGET PLAN
LM/GA PROGRAMS/ACTIVITIES PROVIDE SOCIAL
ECONOMIC INVESTMENT (specific purposes/
policy/discretionary)
GWP (SECTORAL APPROACH)
ALLOCATED INDIRECTLY TO LM/GA/ REGIONAL GOVT.

• GOVERNMENT PROGRAMS/ACTIVITIES PROVIDE
• SOCIAL SAFETY NET
• FISCAL BALANCE
• CONTINGENCIES

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PERFORMANCED ORIENTED BUDGET APPROACH

• Integrating National Priority (as National
  Strategic levels) to Programs Outcome (as
  Strategic Level for Line-Ministries / Govt
  Agency) into Activities (as an Operational Level
  within Line-Ministries / Govt Agency
• Determining Key Performance Indicator of Program
  and Activity, as consequence, government will
  focus on output outcome rather than control the
  input
• Developing Budget Preparation Template which
  provides appropriate Performance Information
• Developing Performance Evaluation Template which
  provides Performance Achievement Information
• Building costing methodology by utilizing
  standardized input and activity costs to achieve
  allocative and operational efficiency.

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MEDIUM TERM EXPENDITURE FRAMEWORK APPROACH

• Preparing medium term macro economic assumption
• Preparing medium term fiscal targets (tax ratio,
  deficit, debt ratio etc)
• Developing medium term budget (revenue,
  expenditure, financing) which yields total
  government resource envelope.
• Medium term resource envelope performs as a
  baseline for preparing LM/GAs budget forward
  estimates.
• Adjusting a LM/GAs budget forward estimates with
  current standard unit cost and government policy
  in preparing budget preparation.

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CHALLENGES

• Legal Aspect
• Revised the Government Regulation to accommodate
  proposed budgeting system
• reform
• Harmonized all existing regulation related to
  public finance management, to avoid
• both overlapping and conflicting rules
• Paradigmshifting the government control
  paradigm
• From tight input cost to performance based
  budget
• From compliance and stewardess to let the
  managers manage, but
• keep them accountable
• Dealing with the Parliament
• Too deep intervention of the Parliament
• Lengthy and detail deliberation process
• Costly decision making process

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Thank You
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ATTACHMENTS
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What achievement has been reached and what are
the next Challenges (1) ?
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What achievement has been reached and what are
the next Challenges (2) ?
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What achievement has been reached and what are
the next Challenges (3) ?
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What achievement has been reached and what are
the next Challenges (4) ?
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What achievement has been reached and what are
the next Challenges (5) ?
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What achievement has been reached and what are
the next Challenges (6) ?