Fiscal Consolidation
For the sake of fiscal consolidation, it is better to avoid big projects that bring no benefits.
Visitors look at a mock-up of a residential area during the BCA Expoversary at ICE Bumi Serpong Damai, South Tangerang, on Sunday (11/2). The three-day BCA Expoversary saw property transactions reach Rp 1 trillion.
The 5.07 percent economic growth in 2017 was slightly better than the previous projection. Yet, the growth was still below its potential, and not in line with the government’s medium-term target of around 6-7 percent.
The question is, how should the fiscal policy be arranged to maximize growth?
The improving domestic economic prospect cannot be separated from the recovery of the global economy, which grew more than expected. The International Monetary Fund (IMF) revised global economic growth from 3.7 percent to 3.9 percent in its January 2018 edition of the World Economic Outlook quarterly report.
Improving global economic prospects were also followed by strengthening commodity prices. Such situation brought a “tailwind” effect on our economy, as if something was pushing from behind. Export revenue increased and growth rose.
Nevertheless, the main growth driver, namely domestic consumption and investment, remained relatively stagnant. Household consumption grew only 4.95 percent, gross fixed capital formation (GFCF) by 6.15 percent and fiscal government spending increased by only 2.14 percent. The biggest contribution was from household consumption at 56.13 percent, investment at 32.16 percent and government spending at 9.10 percent.
From this data, the agenda was clear: maximizing government spending to boost people’s purchasing power so that consumption increased and the manufacturing industry grew to reawaken investment.
Although its contribution was small, if government spending could grow higher, it would trigger a significant chain reaction.
From the job perspective, the highest growth was in the information and telecommunications sector at 9.81 percent, while the manufacturing sector grew by 4.27 percent, below the rate of economic growth. Meanwhile, the information and telecommunications sector also slowed from its usual growth of 10 percent. In order to maximize economic growth, the manufacturing sector must be driven faster.
The fiscal policy focus for this year is on social and infrastructure development. To some extent, the focus is to respond to the challenge in maximizing the role of domestic consumption and investment. Unfortunately, the driving force was not too strong, as the tax revenue collection was below potential. Tax reform is one of the major agendas of our economy. Unfortunately, even if it were carried out correctly, the effect would only be seen in the years to come.
If tax revenue collection could cannot be carried out in the short term, the step to be taken is to consolidate spending so it is more effective and efficient. Considering that 53 percent of spending is at the regional level, consolidation with regional administrations is a key step. The challenge is that, with the 171 regional elections this year, bureaucratic performance is experiencing a downturn.
The December 2017 edition of the World Bank’s Indonesian Economic Quarterly contained a full report on the fiscal policy and the performance of regional administrations. There were some interesting conclusions. First, although improvement was seen in the regions, especially in the education and health sectors, the conditions were still unfavorable in many regions. The fiscal policy has not accelerated improvement in the regions.
Second, during a particular period, the regional spending had triggered disparities among the regions. This means that no coherent dynamic exists among the regions. While some regional administrations make serious use of the budget increase for regional development, others do not utilize it properly. Most of the budget stays idle in the bank, or it is poorly managed or spent. There are also regional heads that have been arrested by the Corruption Eradication Commission (KPK).
Third, the budget increase generally was not accompanied by parallel improvements in performance. A case study into the increased education budget was a good step. Even though the amount increased, there was almost no impact (“double for nothing”).
The case study mentioned in the World Bank report showed that increasing the budget without organizational and systemic reform would bring nothing. It is true that the poor performance in the education sector was caused in part by the low remuneration for teachers. However, increasing their income without changing their performance indicator and management (unconditional increase) would have no results. An increase in income will not bring automatic improvement.
A Prasetyantoko
Given the limited fiscal room and the difficulty in raising tax revenue collection in the short term, one strategy that could be taken is to consolidate spending down to the regional level. Improvements must be made starting from planning and budgeting, to execution and through to evaluation.
The World Bank highlighted the lack of synergy in evaluating the budget realization among three ministries: the Home Ministry, the Administrative and Bureaucratic Reform Ministry and the Finance Ministry. Each has a different evaluation module that their administrative work is cut out for them for something that has no real substantial impact.
For the sake of fiscal consolidation, it is better to avoid big projects that bring no benefits. We should not follow what William Shakespeare has said, “Much ado about nothing!”
A PRASETYANTOKO
Lecturer, Atma Jaya Catholic University
