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Indonesia to cut budget deficit to 1% of GDP in 2019

[JAKARTA] Indonesia's new government plans to cut its budget deficit to one percent of gross domestic product by 2019, partly by reforming the tax system, the finance minister said on Thursday.

A shortfall in tax revenue estimated at US$6.15 billion threatened to push the 2014 budget deficit in Southeast Asia's largest economy to breach a legally binding limit of 3 per cent of GDP.

The new government of President Joko Widodo wants to curb the budget deficit, which forces Indonesia to issue bonds to pay interest on outstanding loans. "The way to achieve this is through reform in tax administration," Finance Minister Bambang Brodjonegoro told a news conference. Brodjonegoro had earlier vowed to keep this year's budget deficit at 2.4 per cent of GDP.

Brodjonegoro said he would revise the target for next year's budget deficit to 2 per cent or less, below the 2.2 per cent proposed by the former administration.

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Lowering the budget deficit is key to fiscal prudence, after the US Federal Reserve signalled it could hike interest rates next year, a move that would swell borrowing costs, said Bank Indonesia Senior Deputy Governor Mirza Adityaswara.

The measure to control the budget deficit will reduce the deficit on the current account and benefit Indonesia's economic fundamentals, Adityaswara added.

Besides raising tax collections, the government will cut fuel subsidy allocations after Widodo hiked prices of subsidised fuel in mid-November, a decision Brodjonegoro has said would halve the fuel subsidy funding required next year.

From early next year, Brodjonegoro said, the government plans to set a fixed amount of subsidy per litre of fuel, linking domestic prices to global oil prices. The government now keeps domestic fuel prices fixed.

Brodjonegoro said economic growth of 7 per cent was possible in 2016, barring any major turbulence, with inflation next year expected at around 4.5 per cent to 5 per cent.

Indonesia will have its slowest growth this year since 2009. The finance ministry has forecast growth of 5.1 per cent for 2014 and 5.8 per cent for next year.

Bank Indonesia, the central bank, estimates inflation of 7.9 per cent this year. Some prices spiked after the November fuel price hike of more than 30 per cent to cut the budget deficit and free up funds for uses besides fuel subsidies.

Brodjonegoro expected Indonesia's large current account gap to approach 2 per cent of GDP next year, versus the central bank's estimate of around 3 per cent this year.