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At the very outset, however, it should be noted that anadditional 3% of GDP on social expenditure does notnecessarily imply that public expenditure as a percentageof GDP has to rise proportionately. A large part of theincrease can be achieved by re-prioritizing – shiftingexpenditure from current non-priority sectors to thepriority social sectors. Over 20% of public expenditure,for example, currently goes to support state-ownedenterprises. These subsidies should fall as more ofeconomic activity becomes market-driven, leaving moreto invest in the social sectors.Towards economic recoveryEven during this period of systemic transition, 61Indonesia’s fiscal management goal should be to achieve,sustained stable and equitable economic growth that isconducive to promoting human development. At the sametime it should also be aiming to promote physical security– broadly defined to include the assurance of a viablestate and a cohesive society characterized by the rule oflaw. This will mean therefore not just consideringdevelopment spending or the allocations for the socialsectors but rethinking the entire budget.The opportunities for doing this will depend to a largeextent on macroeconomic performance. Indonesia wasthe country hardest hit by the Asian crisis, and it has beenthe slowest to revive; even today the economic recoveryremains relatively weak and fragile. The crisis itself causeda sudden contraction in GDP and although growth is againpositive it remains lower than before the crisis: 3.5% to4.0%. Total GDP has only just returned to its 1996 leveland per capita income is still lower than before the crisis.Even this recovery has two major weaknesses. First,it has largely been driven by private consumption whichcan be sustained only so long as the economy has unutilizedcapacity 62 ; moreover, as a result of this consumption boomthe domestic savings rate remains below the pre-crisislevel. A second weakness is that investment is too low: atpresent this is only 20% of GDP, some 10 percentagepoints below the pre-crisis level. Continuingmacroeconomic stability should improve the investmentclimate to some extent. But businesses will also needreassurance that the government is determined to tacklecorruption in the justice system, consolidate democraticgovernance and guarantee social peace and cohesion. 63All these conditions are of course closely linked andmutually reinforcing: better governance and social stabilityfoster investment in broadly based growth, but that growthitself will be also conducive to improvements in socialwell-being. 64The post-crisis fiscal environmentThe financial crisis caused severe fiscal pressures –resulting in increased spending, plummeting revenue anda huge domestic debt liability. Some of these constraintshave now eased. The subsidies that were introduced toalleviate the adverse effects of the crisis have since beenwithdrawn or substantially reduced. The debt issue hasbeen addressed to some extent by re-profiling thematurities of domestic bonds and rescheduling the externaldebt, though this only shifts the burden further into thefuture. But the fallout of the crisis is still manifest inmany areas of budgetary management: some sectors likeinfrastructure have been subjected to severe spending cuts,Box 5.1 – Budgetary outcomes as revealed public choiceWhy do governments conduct their budgetary policies in the way they do? The underlying assumption is that governments act as 'benevolent socialguardians'. So in order to have political legitimacy they generally couch their budgetary policies in terms of broad welfare objectives, such as promotingequitable growth and alleviating human poverty. In reality, budget-making is shaped by a whole range of economic-political-institutional interactions - which caninclude deviant political motives that are part of a hidden agenda.Even if the process of budget making is opaque it is usually quite easy to assess the results. This outcome can be considered as the 'revealed public choice'which can then be compared with the stated policy objectives. This tends to show that budgets are prepared by making only incremental changes to theprevious year's allocations - though over the medium term it is possible to discern shifts in policy. Budgets also reflect the balance of political power amonggroups or classes in a society, even if is not always easy to identify such biases.In its fiscal policies how far does the government carry out the mandate from the electorate? This is difficult to say since, in the new democracies of thedeveloping world, elections are rarely fought on clearly articulated economic policy issues, and there are often no effective democratic institutions for ensuringthe accountability of the government's fiscal operations. Instead public accountability is more likely to be achieved through non-institutional mechanismsincluding civic activism, a free press and a broad political awareness. This is why, in spite of the perverse political incentives embedded in many newdemocracies, most governments do at least claim to take the role of 'benevolent social guardians'.Source: Mahmud (2002).61 For in-depth analyses of the nature of this systemic transition, see Mishra (2000, 2001, and 2004).62 See World Bank (2003a), p.2.63 See Mishra (2001) for an articulation of this point in the Indonesian context.64 This follows, for example, from the hypothesis of a ‘path-dependent” development of political and economic institutions. According to this hypothesis, once good institutionshave be created for social progress, they can gather momentum of their own towards further progress. The reverse is true when these institutions are captured by narrow interestgroups. See North (1990).National Human Development Report 2004 51