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Fuelling reforms in Indonesia JAKARTA - It is the single most unpopular decision any Indonesian president could make, with the potential to trigger immediate political unrest. But the move by President Susilo Bambang Yudhoyono to cut costly fuel subsidies and so push fuel prices up by 30 per cent in a poor nation is also the single most important decision for the recovery of the ailing Indonesian economy. And with half the Indonesian population scraping by on less than $2.50 a day, economic growth - and spending on basic services such as health, education and infrastructure - is the key to social and political stability on Australia's northern doorstep. The former president, Megawati Soekarnoputri, long understood this link, but lacked the political courage to take on the protesters. Yesterday, however, fuel prices did finally rise, despite the unhappy mobs and panic buying at the petrol bowsers.

The immediate impact of the fuel subsidy cut is a large injection of funds into Indonesia's national budget. Up to 40 per cent of government expenditure has been diverted into keeping fuel prices artificially low. Rising world oil prices last year pushed the subsidy bill up from $US2.2 billion ($2.77 billion) to close to $US10 billion, more than Jakarta spent on health and education combined. Dr Yudhoyono's critics complain the money is at risk of being siphoned off by corrupt officials, rather than being redirected towards services, especially for the poor. Indonesia's 40 million unemployed and underemployed are extremely vulnerable to flow-on price rises from higher transport costs.

But the big picture is this. Subsidies distort national economies. Indonesia's huge population, and years of economic stagnation since the 1997 Asian economic crisis, has raised popular fears of a slide backwards into deprivation. Economic growth of 7 per cent is needed just to absorb the millions of school leavers who spill into the job market every year. The consequences of a shrinking cake have already been tragically played out in communal conflicts with an economic edge, like the running war between Christians and Muslims in Ambon and riots targeting ethnic Chinese-owned businesses. And decades of decline in public education have pushed many young Indonesians into religious schools, some funded by fundamentalist groups from the Middle East. It is in mosque schools that Indonesian-based Islamic terrorists say they first found their ideological footing.

Clearly, Dr Yudhoyono must do much more than raise fuel prices to persuade foreign investors that he can deliver reforms. But it is an crucial step. Dr Yudhoyono must also tackle endemic corruption and revive confidence in the legal system to woo investors back. Indonesia enjoys a broad, rich resource base and a large, cheap labour pool. It has squandered far too much of its economic potential through weak governance and poor management. It is difficult to overstate the desirability of a more prosperous, democratic nation to Australia's north; Indonesia is a very large, important piece in Asia's strategic and economic jigsaw. Australian investors turned away from Indonesia in droves in the late 1990s. It may be time to have another closer look.

Cracking states with the GST whip

Such is political one-upmanship that none of us should be surprised, perhaps, by the internal contradictions in the renewed campaign of the Treasurer, Peter Costello, to hold the states accountable for their disposal of GST revenue. "You take the money, you take the responsibility," Mr Costello warned the states this week. If the Commonwealth takes "back the responsibility, let me assure you it won't be doing it without taking back some of the revenue base". How can you be taking back something that was never yours in the first place?

By holding the GST stick over the states, Mr Costello has made a rod for his back. He has been too clever by half playing the pea in the cup trick, hoping the observer will not remember the different columns in which he includes the GST to suit his argument of the time.

Mr Costello denies his Government is the highest taxer in Australian history because he insists the GST is not a federal tax. Why? Because states and territories get to spend its proceeds - $35 billion this year, rising to $43 billion in two years. Tax experts judge that to be a very thin argument, but give Mr Costello the benefit of the doubt. If GST is not a federal tax, what moral or legal authority does Mr Costello bring to his threat "to make significant efforts to heighten [the GST] accountability of state governments"? Five months ago, when waging an election battle, Mr Costello was less mired in contradiction. The Commonwealth, he insisted, was powerless to dictate the spending of GST revenue. It was "up to" the states, "their business", to decide GST expenditure. In a December press statement, Mr Costello said the GST windfall was available to the states "to spend according to their own priorities".

Mr Costello may have a point in challenging the states' records in investing GST revenue in necessary public infrastructure and the abolition or reduction of state taxes. He should argue his case on that level, however. He was the Treasurer in the Government that introduced the GST on July 1, 2000, and signed the GST agreement with the states. He was a key player in writing the rules of its expenditure. If they have failed, he should admit he erred. And he should be clear in his own mind, then let the rest of us know, whether the GST is a federal tax and whether he is therefore entitled to a say in how it is spent.

Posted in Politics @ 01 March 2005 by Jeroen · 'Blog' RSS feed · permalink

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