Revisiting Indonesia’s post-COVID fiscal policy

The Indonesian government through its fiscal policy played an important role in supporting the economy, especially for the mid-to-low-income class, which was largely affected by the pandemic.

Shahifa Assajjadiyyah

Shahifa Assajjadiyyah

The Jakarta Post


Face to face: Government representatives (from left) Presidential Chief of Staff Moeldoko, State Secretary Pratikno and Cabinet Secretary Pramono Anung attend a hearing on state budget allocation with House of Representatives Commission II overseeing governance affairs on Sept. 20, 2022.(Antara/Galih Pradipta)

June 7, 2023

JAKARTA – Back in 2020, the COVID-19 pandemic had significant socio-economic impacts on major countries, including Indonesia. The pandemic restrained economic activities, increasing the poverty level and burdening the purchasing power of the mid-to-low income class in Indonesia.

The poverty rate, which in 2H19 was at 9.22 percent, the lowest level in the last 8 years, experienced a sudden increase to 10.19 percent in 2H20 due to COVID-19. Negative impacts could also be seen in the unemployment rate, which was originally recorded at 5.18 percent in 2H19, increasing by 1.89 percentage point (ppt) to 7.07 percent in 2H20.

The Indonesian government through its fiscal policy played an important role in supporting the economy, especially for the mid-to-low-income class, which was largely affected by the pandemic. Adjustments in the fiscal structure were made during the pandemic.

Some of the infrastructure and operational budget was temporarily reallocated to make space for the National Economic Recovery Program (PEN). The increase in spending widened Indonesia’s fiscal deficit sharply from 2.2 percent of gross domestic product (GDP) in 2019 to 6.1 percent in 2020.

The same thing happened in other countries, such as the United States, which had a deficit of 15.4 percent of GDP in 2020, the United Kingdom a deficit of 12.9 percent, and Malaysia a 6.2 percent deficit.

The Indonesian government debt ratio also increased by 9.2 percentage points (ppt) from 30.2 percent of GDP in 2019 to 39.3 percent in 2020.

Fast forward to 2022, when the economy gradually recovered from the pandemic, fiscal conditions changed and were about to return to normal. From a wide deficit in 2020 of 6.14 percent of GDP, the government managed to consolidate and reduce the deficit significantly to 2.38 percent of GDP, below the 3-percent limit allowed by the law, earlier than scheduled.

The fast progress was in line with the significant economic recovery. In 2022, there were many events, both domestically and globally, that benefited the fiscal condition. Domestically, after the revocation of public activity restrictions (PPKM), the level of economic activities and consumption increased rapidly, and this certainly had a positive impact on tax revenues.

Value added tax (VAT) revenues in 2022 managed to reach 124 percent of the target. The significant increase was also contributed by the implementation of an increase in the VAT rate from 10 to 11 percent in early 2022. Since VAT contributed 35 percent to overall tax revenues, the achievement gave a large, positive impact to the overall revenue.

Some of the external events, to some extent, also brought advantages to Indonesia’s fiscal condition.

Soaring commodity prices driven by the war between Russia and Ukraine has led Indonesia to receive large non-oil and gas income tax revenues, especially from coal. Taxes in this sector grew significantly by 43 percent, far exceeding the government’s 2022 target of 145 percent. As it contributed 60 percent to the total revenue, it gave a large positive impact on the revenue.

However, the increase in commodity prices had a negative impact on government spending. The increase in world crude oil prices forced the government to adjust fuel prices. Yet, the government managed to achieve notable improvements in the fiscal condition.

The fiscal consolidation plan to reduce the deficit to below 3 percent of GDP, which was originally targeted to be achieved in 2023, was achieved more quickly in 2022 with a deficit of 2.38 percent of GDP. The government had a sizable excess cash balance (SiLPA) of approximately Rp 119 trillion. This sizable amount of cash gave more fiscal space for the government in going forward.

Entering 2023, the government was faced with various global and domestic economic dynamics. Some of the positive effects that previously benefited the government in 2022 began to subside. Commodity prices began to decline gradually. Domestic consumption and activities continued to recover, despite facing challenges of a potential global slowdown in various countries.

Yet, amid those uncertainties that occurred in the global economy, the Indonesian economy was resilient and fiscal policy was in healthy condition. In the first four months of 2023, the government recorded a fiscal surplus. At the end of April 2023, the fiscal surplus reached 1.12 percent of GDP or Rp 234.7 trillion, the largest fiscal surplus ever recorded.

What drove this high surplus? Several reasons contributed to this.

The first was that state revenues were showing good performance in early 2023. Even though the growth was not as high as in 2022 due to the high base effect, realization was still at a similar pace as the previous year. As of 1Q23, the state revenue reached 26 percent of the 2023 state budget target. Compared with 2022, the state revenue realization in 1Q22 was not much different, around 27 percent from the 2022 target.

As the economy started to recover, state spending tended to be more flexible as the burden to support the mid-to-low-income society was not as large as in the previous years. The PEN program, which was originally launched in 2020, gradually phased out as COVID-19 came under control and the economy continues to recover.

Further, the large fiscal surplus in the first four months of this year should create a wider fiscal space for the government to pursue more productive spending. Some of the programs that were delayed during the pandemic can be restarted. This year, the government allocated higher spending for infrastructure projects, education and food security. If the realization can be pushed above the target, contribution for the economy would be significant.

In terms of financing, the government implemented a front-loading strategy amid rising global challenges. In 1Q23, the realization of financing from net issuance of government bonds reached 31 percent of the 2023 target.

This percentage is far above 1Q22, which only reached 13 percent of the 2022 target. The government bond issuance received positive responses from domestic buyers, especially retail buyers, which has increased significantly this year.

Overall, we appreciate the government’s efforts in managing the fiscal policy, which has successfully cushioned the economy throughout the pandemic. Economic growth in 2022 recovered to its pre-pandemic levels at 5.3 percent. Other economic indicators also show notable improvement. As of 2H22, poverty was brought back down to 9.57 percent, near the pre-pandemic level of 2H19. The unemployment rate was recorded at 5.86 percent in 1H23, near the pre-pandemic level of 5.18 percent in 2H19.

The writer is a junior economist at Bank Mandiri.

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