Despite the substantial progress inmanaging its fiscal challenges post-1997 financial crisis,Indonesia's risks to the budget have not disappeared,though the Government continues to be committed to fiscalconsolidation. While debt sustainability is improving, thebudget remains vulnerable to shocks, and, largenon-discretionary spending (interest payments, transfers tothe regions, personnel spending) still constrain the use offiscal policy for macroeconomic stabilization, and socialrisk protection, and, as the fiscal situation improves, anddecentralization proceeds, a rethinking of resourceallocation becomes necessary. This report assessesIndonesia's progress in dealing with challenges thathave altered the fiscal system since the crisis, and reviewsoptions for fiscal consolidation, as well as sectoral issuesin the new decentralized environment, including publicexpenditure management reforms. Suggestions include anincreased revenue mobilization to make the budget more riskproof, and an improved tax administration, rather thanstreamlining the tax structure alone, while theGovernment's decision to eliminate the fuel subsidyremains critical for fiscal consolidation (which has littlesocial implications). Moreover, the large interest paymentsburden incurred during the crisis, is crowding outdevelopment spending, and similarly, increased transfers tolocal governments are limiting discretionary spending (whichcould be accompanied by a decrease in central developmentspending in areas of regional responsibilities). Arefinement of the budget management system is necessary,where the Finance Law would be instrumental in establishingaccountability between the Executive, and Parliament.
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