It also means that tax-exempt areas like Batam island will lose their privileges. Other measures will include issuing special government bonds, slashing provincial development funds and a possible default on interest paid to banks on government bonds. The new budgetary strategy is risky and may not work. To begin with, the tax hikes and subsidy cuts need parliamentary approval. According to University of Indonesia economist Sri Mulyani Indrawati, parliament has approved only a 5 trillion rupiah reduction in subsidies.
Interest rates are another wild card.
That would hurt the banks, which hold most of the bonds, but save the government from having to curtail routine expenditure. Indeed, most economists say there's little danger of the government going broke. Some transfers to the provinces, around 2 trillion rupiah, will be issued as government bonds to defray the initial outlay. Foreign-debt obligations are not considered a factor because interest rates are for the most part concessionary. Should this also coincide with continuing political turbulence, a falling rupiah and skyrocketing interest rates, there's no guarantee the new budget plan will work, economists say.