indonesia's deficit and fiscal policy
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Indonesia’s deficit and fiscal policy 2019: markets are confident in the country’s macroeconomic management

We are delighted to learn that as we welcome the 2019 elections year with its heavy political agenda, the Indonesia’s deficit and fiscal policy, which are key components of macroeconomic management, is showing positive developments. Government revenues this year are to most likely exceed the target set in the budget, perhaps for the first time in two decades.

Finance Minister Sri Mulyani Indrawati announced last week that based on the budget realization as of last month, government revenues were almost 87.5 percent of the Rp 1.89 quadrillion (US$126.3 billion) target because tax receipts had increased by 15.2 percent from last year, excise taxes by nearly 15 percent and non-tax revenues by 28 percent.

The virtuous-circle development of this positive trend is that for the first time in over a decade the government would not need to propose a budget amendment to the House of Representatives and the overall budget deficit would be checked at 1.86 percent of gross domestic product (GDP), lower than the 2018 budget target of 2.2 percent and even far below the 3 percent legal ceiling.

Yet, more significant is that the great performance of revenue collection would slash the estimated deficit in the primary balance of the budget (the margin between the overall revenues and spending, excluding debt service payments) to Rp 15 trillion from the Rp 87 trillion target. Further down the line this means the government would need to borrow less next year.

Certainly, the great positive development in the revenue sector should partly be attributed to the results of the national tax amnesty last year, which succeeded in significantly broadening the tax base.

The credibility of fiscal management, which was also cited by Moody’s rating agency in its latest positive assessment of Indonesia’s investment grade, would help maintain market confidence in the country’s macroeconomic management despite unfavorable external factors as uncertainty about the global economy, increased trade protectionism and the risk of financial market volatility due to the United States Federal Reserve’s money tightening.

Under Sri Mulyani’s leadership the government has indeed been quite disciplined in upholding the fiscal rules of limiting the cumulative budget deficit at a maximum of 3 percent of GDP and government debt at a maximum of 60 percent of GDP. This sends a strong signal to the market, notably lenders, that the government is strongly committed to prudent borrowing.

However, it is not a time for complacency. It is needless to remind anyone that the fiscal landscape over the last decade has tended to show significant in-year and year-to-year volatility in major budget components (spending and revenues).

The major year-to-year fluctuations on the spending side have been in fuel subsidies and capital expenditures. On the revenue side, the major source of year-to-year and within-year fluctuations has always come from natural resource non-tax revenues.

This means that the government remains reliant on natural resource revenues, which are highly volatile and vulnerable to international market conditions. The key message therefore remains the same: Boost investment in natural resource-based manufacturing and improve corporate and personal income tax collection.

 

 


Article source: http://www.thejakartapost.com/academia/2018/12/10/low-deficits-and-fiscal-prudence.html

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