Indonesian budget process and system
The year 2005 is the first year of budget reform implementation as warranted by Law No. 17/2003 on Public Finance and Law No. 1/2004 on State Treasury. The reform includes the implementation of Unified Budget, Medium Term Expenditure Framework and Performance Budget as well the implementation of functional classification based on Government Financial Statistic (GFS).
In addition, the government needs an independent auditor to supervise the implementation of Public Finance. On the basis of that goal, Law No. 15/2004 regarding Audit of the Public Finance Management and Responsibilties has been issued.
As the reform commences, adjustments need to be made in state budget, such as the concepts and terms, the budget cycle, planning and implementation. In order to have better understanding, this chapter will discuss the budget coverage, the budget composition and classifications, the budget formulation process, implementation, and its accountability.
I. Basic Conceptions
State budget has the following functions:
• Authorization
State budget is the basis for revenue generation and expenditure implementation in one fiscal year
• Planning
State budget is the guideline for management to plan activities in one fiscal year
• Supervision
State budget is the guideline for assessing whether the governance has been implemented properly.
• Allocation
State budget should be directed to reduce the rate of unemployment and resource inefficiency, and increase economic efficiency and effectiveness.
• Distribution
State budget policies should always put justice and fairness into consideration.
• Stabilization
State budget is an instrument to maintain and endeavor the balance of economic fundamentals.
II. Laws and Regulations
The laws and regulation underlying state budget formulation are
a. Constitution of Republic of Indonesia 1945 and its Amendments;
b. Law No.17/2003 on Public Finance;
c. Law No. 1/2004 on State Treasury;
d. Law No.15/2004 on Audit of the Public Finance Management and Responsibilties;
e. Law No. 32/2004 on Regional Government;
f. Law No. 33/2004 on Fiscal Balance between Central Government and Regional Government;
g. Government Decree No. 20/2004 on Government Strategic Plan;
h. Government Decree No. 21/2004 on Formulation Work Plan and Budgetting of Line Ministry/Agency.
III. Fiscal Year (FY)
Fiscal year is the period of 12 months during which the budget is implemented. Indonesian fiscal year commences on January 1st, and ends on December 31st.
IV. Scope of State Budget
The scope of state budget is:
1. Line ministry/agency budget
a. Line Ministry Fund
The fund originates from state budget and is managed by line ministries in accordance to their main task and functions
b. Deconcentration Fund
Deconcentration fund is line ministry’s fund originating from state budget that is transferred to governor in his capacity as representative of central government. It includes all revenue generation and expenditure of line ministry in the region in order to implement deconcentration principles but exclusive of fund allocated for the expenditure of line ministry’s vertical unit in the region.
c. Assisted Task Fund
Assisted Task Fund is line ministry’s fund from state budget that is transferred to regional governments to finance the ministry’s revenue generation and expenditure in the region in order to implement assisted task principle.
2. Other than Line Ministries Budget
Other than the above, some part of state budget are allocated to: directorate general of budget
-Loan interest repayment (Budget Section 61)
-Subsidy and Transfer (Budget Section 62)
-Other Expenditure (Budget Section 69)
-Balance Fund (Budget Section 70)
-Special Autonomy Balancing Fund (Budget Section 71)
-Foreign Amortization (Budget Section 96)
-Domestic Amortization (budget Section 97)
-On-lending (Budget Section 98)
-State Capital Investment (Budget Section 99)
3. Balance Fund
Balance fund originates from state budget and is transferred to the regions to finance the regions’ needs in the implementation of decentralization. Balance fund consists of:
- Revenue sharing, i.e. transferred fund originating from tax and natural resources
-General Allocation Fund (DAU), i.e. fund from state budget, the purpose of which is to correct horizontal imbalance and to finance regional expenditures in the implementation of decentralization.
-Specific Allocation Fund (DAK) i.e. fund from state budget that is transferred to the regions to aid the financing of special activities which are the region’s responsibility and relevant to national priority.
V. Budget Classification and Composition
Budget composition for fiscal year 2005 is still based on I-account, with several adjustments both format-wise and structure-wise. They are:
-Separation between central government expenditure and regional expenditure.
-State expenditure that is subsidy or aid in nature is classified as subsidy
-Expenditure containing the term ‘other’ is classified as other expenditure.
Budget classification consist of:
1. Classification by Organization, i.e. classification according to state ministries and agencies that are established to carry out specific tasks and functions based on Constitution 1945 and the prevailing laws and regulation. Each ministry/agency is further divided into organizational units and work units (satuan kerja/satker). For fiscal year 2005, work units are grouped into:
a. Central Work Unit, i.e. work unit whose authority and responsibility lie in central office of its ministry/ agency, regardless of its location that can be both in the capital or the regions.
b. Technical Implementer Work Unit of Ministry/Agency, i.e. work unit whose authority comes from central office but the day-to-day management is done by central office’s vertical unit in the regions.
c. Special Work Unit, i.e. work unit that is established to conduct budget management activities of activities/ programs financed by budget other than the ministry/agency budget.
d. Regional Apparatus Work Unit, i.e. work unit whose authority and responsibility are transferred from ministry/agency to governor for the implementation of deconcentration tasks and to governor/head of district/major of predesignated province/district/municipality for assisted tasks.
e. Specified Non Vertical Work Unit, i.e. work unit that is not a vertical unit eventhough its authority and responsibility come from central office. This work unit is established because the aforementioned authority and responsibility cannot be delegated directly to Regional Apparatus Work Unit.
f. Temporary Work Unit, i.e. work unit that is established for only one year because the authority and responsibility of financial management cannot be delegated to work units described from point b to e.
2. Classification by Function is classification based on service functions conducted by government to public, both individually and collectively, to redistribute income and increase public wealth. This classification is enacted in 2005 to replace classification by sector.
The reasons underlying the implementation of classification by function are:
a. This type of classification facilitate stakeholder in assessing the level of success of budget implementation and the performance of a certain function.
b. Classification by function refers to Government Financial Statistic, therefore conducting cross country analysis will be easier since the practice is internationally approved.
c. Financial report that refers to GFS will satisfy policy and fiscal condition analysis needs.
Law Number 17/2003 stipulates the following functions:
a. General Public Services
General Service function includes Legislative and Executive Institutions, Financial and Fiscal affairs, Foreign Affair, Foreign Aid, Public Service, Science and Technology Research and Development, Government Loan, Regional Development. Governmnet Public Service Research and Development, and other general services.
b. Defense
Defense function includes National Defense, Defense Support, Foreign Military Aid, Defense Research and Development, and other defense-related activities.
c. Public Order and Safety
Security and order function includes Police, Disaster Control, Law Development, Trial, State Penitentiary, Public Order Research and Development, Security and Law, and other Public Order, Security and Law functions.
d. Economic Affairs
Economic function includes Commerce, Business Development, Cooperation and Small to Medium Scale Industry, Employment, Agriculture, Forestry, Fishery and Marine, Irrigation, Fuel and Energy, Mining, Industry and Construction; Transportation, Telecommunication and Information Technology, Economic Research and Development, and other economic functions.
e. Environmental Protection
Environment function includes Waste Management, Liquid Waste Management, Pollution Control, Natural Resource Conservation, Landscape Planning and Land Affairs, Environment Protection Research and Development, and other environment protection functions.
f. Housing and Community Amenities
Housing and community amenities function includes Housing Development, Settlement Community Development, Water Service Provision, Street Lighting, Housing and Settlement Research and Development, and other housing and settlement functions.
g. Health
Health function includes Medicine and Medical Supply, Individual Health Service, Public Health Service, Family Planning, Health Research and Development, and other health functions.
h. Tourism and Culture
Tourism and culture function includes Tourism and Culture Development, Youth and Sport Development, Publishing and Broadcasting Development, Culture, Youth, and Tourism Research and Development and other tourism and culture functions.
i. Religion
Religion function includes Religious Life Enhancement, Religious Harmony, Religious Research and Development and other religious services.
j. Education
Education function includes Early Education, Elementary Education, Intermediate Education, Non Formal and Informal Education, Government Official Education, Higher Education, Educational Aid Services, Religious Education, Education Research and Development, and other education functions.
k. Social Security
Social security function includes Security and Services for the Disabled and Ailed, Security and Services for Elderly Citizens, Security and Services for families of War Survivors, Social Security and Services for Children and Families, Women Empowerment, Social Information and Mentoring, Housing Aid, Social Aid and Safety, Social Security Research and Development, and other social security functions.
3. Economic Classification, i.e. classification that cathegorizes budget into 8 types of expenditures:
a. Personnel Expenditure, i.e. an amount of cash and/or goods given to civil servants as compensation for their services.
b. Material Expenditure, i.e. disposable goods and services expenditure needed to produce marketed or unmarketed goods and services.
c. Capital expenditure, i.e. expenditures aimed at establishing capital that adds to ministry/agency’s asset and inventory.
d. Interest, i.e. payment for usage of loan principle, both foreign and domestic
e. Subsidy, i.e. budget allocation given to institution/enterprise that produces, sells, exports or imports good and services that is crucial to public in order to make the price affordable.
f. Social Aid, i.e. transfer of cash or goods to public to protect them from social risks. The aid can be given directly to the citizens and/or public institution, including aid for non-gevernment organization in the area of education and religion.
g. Grant, i.e. transfer of cash and capital to foreign government or international organization.
h. Other expenditures, i.e. central government expenditures that cannot be classified into types of expenditure from poin a to g.
VI. Budgetting Approach
a. Integrated Budgetting
By integrating recurrent and development expenditures budgeting process will be more transparent, and in addition, it will make budget formulation and implementation more performance-oriented. This is necessary to ensure that recurrent investment and operational cost be considered simultaneously.
b. Budgetting in Medium Term Perspective
This approach provides comprehensive framework, affirms the linkage between planning and budgeting process, develops fiscal discipline, and strengthens public’s trust in the government by providing more efficient and optimum services. Medium term projection minimizes the uncertainty of future fund availability for financing on-going and new policies by taking into account the implications of the new policy to fiscal sustainability.
c. Performance-based Budgetting
This approach emphasizes that strategic plan and budget proposal should be based on achievement and the aim to which ministry/agency’s programs and activities should be directed in order to achieved the standardized result and output of Government Strategic Plan. In order to be efficient, budget formulation is based on unit cost per output and activity.
VI. State Budget Preparation
State budget formulation as depicted on chart 1 is as follows:
The Minister of Planning and Minister of Finance enact indicative ceiling, that is a rough estimate of ministry/ agency’s budget ceiling for every program, as a reference for strategic planning formulation.
Based on development priority and indicative ceiling line ministries formulate their strategic plan for the following fiscal year.
Meanwhile, on the second week of May, at the latest, the government submits Governmnet Strategic Plan (RKP), which is detailed manifestation of National Medium Term Strategic Plan (RPJM), along with the fundamentals of fiscal policies and macroeconomic framework for the following fiscal year to the Parliament.
-The fundamentals of fiscal policy includes principles underlying fiscal policy, fiscal policy on state revenue and grant, fiscal policy on expenditure, and fiscal policy on budget financing.
-Macroeconomic framework includes prospect of world economy, macoroeconomic policy, and state budget indicator assumptions
Afterwards, the government and the Parliament will discuss macroeconomic framework and the fundamentals of fiscal policy in budget proposal preliminary hearing, the relust of which will become reference for ministries and agencies in formulating their budget proposal.
Having received Circular Letter of Miniter of Finance regarding temporary ceiling on mid June, ministries and agencies formulate their strategic plan and budget proposal (RKA-KL), using RKP as guidelines and employing the following approaches: (a) Medium Term Ezpenditure Framework, (b) Integrated Budgetting, and
(c) Performance-based budgeting.
RKA-KL also classifies expenditures according to organization, function, program, activity and type.
The ministries and agencies goes into deliberation with related committees in the Parliament to discuss RKA-KL in Juli at the latest. The deliberated RKA-KL will be submitted to and scrutinized by the Ministry of Planning and the Ministry of Finance to analyse its accordance to RKP, Circular Letter of Ministry of Finance on Temporary Ceiling, forward estimate that was approved the previous year, and the approved unit cost standard.
Ministry of Finance will compile all the analysed RKAKL to be included in the deliberation with the Cabinet along with Financial Notes and Budget Proposal. This phase should be completed by August at the latest and State Budget Law should be enacted by the end of October.
The RKA-KL that is approved by the Parliament will be enacted as Presidential Decree on Detailed State Budget by the end of November which will subsequently used as the basis for formulating budget implementation document (DIPA) concept.
The DIPA is submitted to the Minister of Finance (c.q. Directorate General of Treasury) in its capacity as State Treasurer by the second week of December at the latest so that it can be authorized by the Minister of Finance by December 31st.
VII. Budget Implementation
Law 17/2004 has made it particularly clear that the Ministier of Finace has the authoriety and responsibility of a Chief Financial Officer in managing the state’s assets and obligations, meanwhile line Ministers and Head of Agencies are Chief Operational Officers who have the authority and are responsible over governance administration. In other words, a distinction has been made between which unit has administrative authority and which treasury authority.
Adminitrative authority includes entering into binding commitment and other measures that result in state revenue and expenditure, conducting analysis and forwarding bills to ministries/agencies in relation to the commitment realization, and issuing payment order or claim revenue as a result of budget implementation.
Minister of Finance as State General Treasurer and other officials as Acting State General Treasurer has the authority of not only state revenue and expenditure, but also to monitor them.
In the implementation of state budget, Minister/Head of Agency :
• formulates budget implementation documents;
• appoints officials:
-as Acting Budget/Goods User;
-in charge of collecting state revenue;
-to perform actions resulting in state expenditure;
-in charge of assessment and payment order;
-that will be the treasurer in issuing and receiving goods.
• issues payment order (SPM);
• has the authority to:
-assess the validity of material evidence of the claimant’s right ;
-analyse the output of prerequisite documents in goods/service provision commitment/agreement;
-conduct budget availability check;
-post expenditure;
-issue order payment based according to state budget
In his capacity as State General Treasurer, Ministry of Finance is obliged to:
• check the comprehensiveness of payment order issued by the Budget User/Acting Budget User;
• check the bill calculation as stated in payment order
• check the availability of the fund in question
• order fund disbursement as basis of state expenditure
• disallow fund disbursement issued by Budget User/Acting Budget User should it fail the predesignated requirements
IX. State Finance Accountability
Law 17?2003 states that budget implementation accountability report is submitted in the form of finance report that consists of budget realization report, balance, cash flow report, and notes on financial report that is in accordance to government accounting standard. Governmentfinancial report should be submitted on time and is consistent with government accounting standard.
The report will be audited by State Auditor Agency (BPK) and submitted to the Parliament within six months, at the latest, after the fiscal year in question ends.
Furthermore, Law 15/2004 states that in order to accomplish state finance management as warranted by Law 17/2003 and Law 1/2004, an audit conducted by the independent and autonomous State Auditor Agency as has been stipulated by article 23(e) of the 1945 Constitution is deemed necessary. In these laws, BPK has the independence and autonomy in 3 stages of auditing:
a. independence in planning stage, i.e. free to determine object to be subjected for auditing, except for matters regulated by law or special request by representative agency;
b. independence in the administering of auditing activities, i.e. free to determine the timeframe and method of auditing, including investigative methods.
c. Independence in reporting the audit result
In relation to state finance management and accountability, the auditing involves:
a. Financial audit, i.e. audit over central and local government financial report.
b. Performance audit, i.e. audit over economy, efficiency, and effectiveness aspects which is generally performed by government internal auditing apparatus for the benefit of the management;
c. Audit for special purposes, i.e. auditing conducted for special purposes, aside from financial and performance audit. This type of audit includes audit over matters related to finance and investigation. Audit report will be submitted to the Parliament and government. The report will be used by the government to make the necessary correction and adjustments. The Governmnet is given the chance to forward their response to the findings and conclusion of the report. Upon discovering criminal evidence, BPK must report it to the authority, as has been stipulated in Law 15/2004. In the effort to improve transparence and increase public participation, the Law stipulated that every audit report that has been submitted to the Parliament is declared open for public.
In addition, the government needs an independent auditor to supervise the implementation of Public Finance. On the basis of that goal, Law No. 15/2004 regarding Audit of the Public Finance Management and Responsibilties has been issued.
As the reform commences, adjustments need to be made in state budget, such as the concepts and terms, the budget cycle, planning and implementation. In order to have better understanding, this chapter will discuss the budget coverage, the budget composition and classifications, the budget formulation process, implementation, and its accountability.
I. Basic Conceptions
State budget has the following functions:
• Authorization
State budget is the basis for revenue generation and expenditure implementation in one fiscal year
• Planning
State budget is the guideline for management to plan activities in one fiscal year
• Supervision
State budget is the guideline for assessing whether the governance has been implemented properly.
• Allocation
State budget should be directed to reduce the rate of unemployment and resource inefficiency, and increase economic efficiency and effectiveness.
• Distribution
State budget policies should always put justice and fairness into consideration.
• Stabilization
State budget is an instrument to maintain and endeavor the balance of economic fundamentals.
II. Laws and Regulations
The laws and regulation underlying state budget formulation are
a. Constitution of Republic of Indonesia 1945 and its Amendments;
b. Law No.17/2003 on Public Finance;
c. Law No. 1/2004 on State Treasury;
d. Law No.15/2004 on Audit of the Public Finance Management and Responsibilties;
e. Law No. 32/2004 on Regional Government;
f. Law No. 33/2004 on Fiscal Balance between Central Government and Regional Government;
g. Government Decree No. 20/2004 on Government Strategic Plan;
h. Government Decree No. 21/2004 on Formulation Work Plan and Budgetting of Line Ministry/Agency.
III. Fiscal Year (FY)
Fiscal year is the period of 12 months during which the budget is implemented. Indonesian fiscal year commences on January 1st, and ends on December 31st.
IV. Scope of State Budget
The scope of state budget is:
1. Line ministry/agency budget
a. Line Ministry Fund
The fund originates from state budget and is managed by line ministries in accordance to their main task and functions
b. Deconcentration Fund
Deconcentration fund is line ministry’s fund originating from state budget that is transferred to governor in his capacity as representative of central government. It includes all revenue generation and expenditure of line ministry in the region in order to implement deconcentration principles but exclusive of fund allocated for the expenditure of line ministry’s vertical unit in the region.
c. Assisted Task Fund
Assisted Task Fund is line ministry’s fund from state budget that is transferred to regional governments to finance the ministry’s revenue generation and expenditure in the region in order to implement assisted task principle.
2. Other than Line Ministries Budget
Other than the above, some part of state budget are allocated to: directorate general of budget
-Loan interest repayment (Budget Section 61)
-Subsidy and Transfer (Budget Section 62)
-Other Expenditure (Budget Section 69)
-Balance Fund (Budget Section 70)
-Special Autonomy Balancing Fund (Budget Section 71)
-Foreign Amortization (Budget Section 96)
-Domestic Amortization (budget Section 97)
-On-lending (Budget Section 98)
-State Capital Investment (Budget Section 99)
3. Balance Fund
Balance fund originates from state budget and is transferred to the regions to finance the regions’ needs in the implementation of decentralization. Balance fund consists of:
- Revenue sharing, i.e. transferred fund originating from tax and natural resources
-General Allocation Fund (DAU), i.e. fund from state budget, the purpose of which is to correct horizontal imbalance and to finance regional expenditures in the implementation of decentralization.
-Specific Allocation Fund (DAK) i.e. fund from state budget that is transferred to the regions to aid the financing of special activities which are the region’s responsibility and relevant to national priority.
V. Budget Classification and Composition
Budget composition for fiscal year 2005 is still based on I-account, with several adjustments both format-wise and structure-wise. They are:
-Separation between central government expenditure and regional expenditure.
-State expenditure that is subsidy or aid in nature is classified as subsidy
-Expenditure containing the term ‘other’ is classified as other expenditure.
Budget classification consist of:
1. Classification by Organization, i.e. classification according to state ministries and agencies that are established to carry out specific tasks and functions based on Constitution 1945 and the prevailing laws and regulation. Each ministry/agency is further divided into organizational units and work units (satuan kerja/satker). For fiscal year 2005, work units are grouped into:
a. Central Work Unit, i.e. work unit whose authority and responsibility lie in central office of its ministry/ agency, regardless of its location that can be both in the capital or the regions.
b. Technical Implementer Work Unit of Ministry/Agency, i.e. work unit whose authority comes from central office but the day-to-day management is done by central office’s vertical unit in the regions.
c. Special Work Unit, i.e. work unit that is established to conduct budget management activities of activities/ programs financed by budget other than the ministry/agency budget.
d. Regional Apparatus Work Unit, i.e. work unit whose authority and responsibility are transferred from ministry/agency to governor for the implementation of deconcentration tasks and to governor/head of district/major of predesignated province/district/municipality for assisted tasks.
e. Specified Non Vertical Work Unit, i.e. work unit that is not a vertical unit eventhough its authority and responsibility come from central office. This work unit is established because the aforementioned authority and responsibility cannot be delegated directly to Regional Apparatus Work Unit.
f. Temporary Work Unit, i.e. work unit that is established for only one year because the authority and responsibility of financial management cannot be delegated to work units described from point b to e.
2. Classification by Function is classification based on service functions conducted by government to public, both individually and collectively, to redistribute income and increase public wealth. This classification is enacted in 2005 to replace classification by sector.
The reasons underlying the implementation of classification by function are:
a. This type of classification facilitate stakeholder in assessing the level of success of budget implementation and the performance of a certain function.
b. Classification by function refers to Government Financial Statistic, therefore conducting cross country analysis will be easier since the practice is internationally approved.
c. Financial report that refers to GFS will satisfy policy and fiscal condition analysis needs.
Law Number 17/2003 stipulates the following functions:
a. General Public Services
General Service function includes Legislative and Executive Institutions, Financial and Fiscal affairs, Foreign Affair, Foreign Aid, Public Service, Science and Technology Research and Development, Government Loan, Regional Development. Governmnet Public Service Research and Development, and other general services.
b. Defense
Defense function includes National Defense, Defense Support, Foreign Military Aid, Defense Research and Development, and other defense-related activities.
c. Public Order and Safety
Security and order function includes Police, Disaster Control, Law Development, Trial, State Penitentiary, Public Order Research and Development, Security and Law, and other Public Order, Security and Law functions.
d. Economic Affairs
Economic function includes Commerce, Business Development, Cooperation and Small to Medium Scale Industry, Employment, Agriculture, Forestry, Fishery and Marine, Irrigation, Fuel and Energy, Mining, Industry and Construction; Transportation, Telecommunication and Information Technology, Economic Research and Development, and other economic functions.
e. Environmental Protection
Environment function includes Waste Management, Liquid Waste Management, Pollution Control, Natural Resource Conservation, Landscape Planning and Land Affairs, Environment Protection Research and Development, and other environment protection functions.
f. Housing and Community Amenities
Housing and community amenities function includes Housing Development, Settlement Community Development, Water Service Provision, Street Lighting, Housing and Settlement Research and Development, and other housing and settlement functions.
g. Health
Health function includes Medicine and Medical Supply, Individual Health Service, Public Health Service, Family Planning, Health Research and Development, and other health functions.
h. Tourism and Culture
Tourism and culture function includes Tourism and Culture Development, Youth and Sport Development, Publishing and Broadcasting Development, Culture, Youth, and Tourism Research and Development and other tourism and culture functions.
i. Religion
Religion function includes Religious Life Enhancement, Religious Harmony, Religious Research and Development and other religious services.
j. Education
Education function includes Early Education, Elementary Education, Intermediate Education, Non Formal and Informal Education, Government Official Education, Higher Education, Educational Aid Services, Religious Education, Education Research and Development, and other education functions.
k. Social Security
Social security function includes Security and Services for the Disabled and Ailed, Security and Services for Elderly Citizens, Security and Services for families of War Survivors, Social Security and Services for Children and Families, Women Empowerment, Social Information and Mentoring, Housing Aid, Social Aid and Safety, Social Security Research and Development, and other social security functions.
3. Economic Classification, i.e. classification that cathegorizes budget into 8 types of expenditures:
a. Personnel Expenditure, i.e. an amount of cash and/or goods given to civil servants as compensation for their services.
b. Material Expenditure, i.e. disposable goods and services expenditure needed to produce marketed or unmarketed goods and services.
c. Capital expenditure, i.e. expenditures aimed at establishing capital that adds to ministry/agency’s asset and inventory.
d. Interest, i.e. payment for usage of loan principle, both foreign and domestic
e. Subsidy, i.e. budget allocation given to institution/enterprise that produces, sells, exports or imports good and services that is crucial to public in order to make the price affordable.
f. Social Aid, i.e. transfer of cash or goods to public to protect them from social risks. The aid can be given directly to the citizens and/or public institution, including aid for non-gevernment organization in the area of education and religion.
g. Grant, i.e. transfer of cash and capital to foreign government or international organization.
h. Other expenditures, i.e. central government expenditures that cannot be classified into types of expenditure from poin a to g.
VI. Budgetting Approach
a. Integrated Budgetting
By integrating recurrent and development expenditures budgeting process will be more transparent, and in addition, it will make budget formulation and implementation more performance-oriented. This is necessary to ensure that recurrent investment and operational cost be considered simultaneously.
b. Budgetting in Medium Term Perspective
This approach provides comprehensive framework, affirms the linkage between planning and budgeting process, develops fiscal discipline, and strengthens public’s trust in the government by providing more efficient and optimum services. Medium term projection minimizes the uncertainty of future fund availability for financing on-going and new policies by taking into account the implications of the new policy to fiscal sustainability.
c. Performance-based Budgetting
This approach emphasizes that strategic plan and budget proposal should be based on achievement and the aim to which ministry/agency’s programs and activities should be directed in order to achieved the standardized result and output of Government Strategic Plan. In order to be efficient, budget formulation is based on unit cost per output and activity.
VI. State Budget Preparation
State budget formulation as depicted on chart 1 is as follows:
The Minister of Planning and Minister of Finance enact indicative ceiling, that is a rough estimate of ministry/ agency’s budget ceiling for every program, as a reference for strategic planning formulation.
Based on development priority and indicative ceiling line ministries formulate their strategic plan for the following fiscal year.
Meanwhile, on the second week of May, at the latest, the government submits Governmnet Strategic Plan (RKP), which is detailed manifestation of National Medium Term Strategic Plan (RPJM), along with the fundamentals of fiscal policies and macroeconomic framework for the following fiscal year to the Parliament.
-The fundamentals of fiscal policy includes principles underlying fiscal policy, fiscal policy on state revenue and grant, fiscal policy on expenditure, and fiscal policy on budget financing.
-Macroeconomic framework includes prospect of world economy, macoroeconomic policy, and state budget indicator assumptions
Afterwards, the government and the Parliament will discuss macroeconomic framework and the fundamentals of fiscal policy in budget proposal preliminary hearing, the relust of which will become reference for ministries and agencies in formulating their budget proposal.
Having received Circular Letter of Miniter of Finance regarding temporary ceiling on mid June, ministries and agencies formulate their strategic plan and budget proposal (RKA-KL), using RKP as guidelines and employing the following approaches: (a) Medium Term Ezpenditure Framework, (b) Integrated Budgetting, and
(c) Performance-based budgeting.
RKA-KL also classifies expenditures according to organization, function, program, activity and type.
The ministries and agencies goes into deliberation with related committees in the Parliament to discuss RKA-KL in Juli at the latest. The deliberated RKA-KL will be submitted to and scrutinized by the Ministry of Planning and the Ministry of Finance to analyse its accordance to RKP, Circular Letter of Ministry of Finance on Temporary Ceiling, forward estimate that was approved the previous year, and the approved unit cost standard.
Ministry of Finance will compile all the analysed RKAKL to be included in the deliberation with the Cabinet along with Financial Notes and Budget Proposal. This phase should be completed by August at the latest and State Budget Law should be enacted by the end of October.
The RKA-KL that is approved by the Parliament will be enacted as Presidential Decree on Detailed State Budget by the end of November which will subsequently used as the basis for formulating budget implementation document (DIPA) concept.
The DIPA is submitted to the Minister of Finance (c.q. Directorate General of Treasury) in its capacity as State Treasurer by the second week of December at the latest so that it can be authorized by the Minister of Finance by December 31st.
VII. Budget Implementation
Law 17/2004 has made it particularly clear that the Ministier of Finace has the authoriety and responsibility of a Chief Financial Officer in managing the state’s assets and obligations, meanwhile line Ministers and Head of Agencies are Chief Operational Officers who have the authority and are responsible over governance administration. In other words, a distinction has been made between which unit has administrative authority and which treasury authority.
Adminitrative authority includes entering into binding commitment and other measures that result in state revenue and expenditure, conducting analysis and forwarding bills to ministries/agencies in relation to the commitment realization, and issuing payment order or claim revenue as a result of budget implementation.
Minister of Finance as State General Treasurer and other officials as Acting State General Treasurer has the authority of not only state revenue and expenditure, but also to monitor them.
In the implementation of state budget, Minister/Head of Agency :
• formulates budget implementation documents;
• appoints officials:
-as Acting Budget/Goods User;
-in charge of collecting state revenue;
-to perform actions resulting in state expenditure;
-in charge of assessment and payment order;
-that will be the treasurer in issuing and receiving goods.
• issues payment order (SPM);
• has the authority to:
-assess the validity of material evidence of the claimant’s right ;
-analyse the output of prerequisite documents in goods/service provision commitment/agreement;
-conduct budget availability check;
-post expenditure;
-issue order payment based according to state budget
In his capacity as State General Treasurer, Ministry of Finance is obliged to:
• check the comprehensiveness of payment order issued by the Budget User/Acting Budget User;
• check the bill calculation as stated in payment order
• check the availability of the fund in question
• order fund disbursement as basis of state expenditure
• disallow fund disbursement issued by Budget User/Acting Budget User should it fail the predesignated requirements
IX. State Finance Accountability
Law 17?2003 states that budget implementation accountability report is submitted in the form of finance report that consists of budget realization report, balance, cash flow report, and notes on financial report that is in accordance to government accounting standard. Governmentfinancial report should be submitted on time and is consistent with government accounting standard.
The report will be audited by State Auditor Agency (BPK) and submitted to the Parliament within six months, at the latest, after the fiscal year in question ends.
Furthermore, Law 15/2004 states that in order to accomplish state finance management as warranted by Law 17/2003 and Law 1/2004, an audit conducted by the independent and autonomous State Auditor Agency as has been stipulated by article 23(e) of the 1945 Constitution is deemed necessary. In these laws, BPK has the independence and autonomy in 3 stages of auditing:
a. independence in planning stage, i.e. free to determine object to be subjected for auditing, except for matters regulated by law or special request by representative agency;
b. independence in the administering of auditing activities, i.e. free to determine the timeframe and method of auditing, including investigative methods.
c. Independence in reporting the audit result
In relation to state finance management and accountability, the auditing involves:
a. Financial audit, i.e. audit over central and local government financial report.
b. Performance audit, i.e. audit over economy, efficiency, and effectiveness aspects which is generally performed by government internal auditing apparatus for the benefit of the management;
c. Audit for special purposes, i.e. auditing conducted for special purposes, aside from financial and performance audit. This type of audit includes audit over matters related to finance and investigation. Audit report will be submitted to the Parliament and government. The report will be used by the government to make the necessary correction and adjustments. The Governmnet is given the chance to forward their response to the findings and conclusion of the report. Upon discovering criminal evidence, BPK must report it to the authority, as has been stipulated in Law 15/2004. In the effort to improve transparence and increase public participation, the Law stipulated that every audit report that has been submitted to the Parliament is declared open for public.
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