Direction of the 2021 State Budget

KOMPAS/HERU SRI KUMORO

Ari Kuncoro

The speech given by the President of the Republic of Indonesia on the 2021 state budget proposal reflects the conditions experienced by Indonesia during the Covid-19 pandemic, namely the demand and supply sides. The 5.32 percent economic contraction in the second quarter of 2020 was deeper than expected, but market players have already anticipated it. This can be seen from the stock market composite index and the rupiah exchange rate, which remain in normal fluctuations.

The interaction between people\'s purchasing power and the hampered national output side is reflected in the contraction of the gross domestic product (GDP), in terms of sector and expenditure sides. The transportation and warehousing sectors contributed the largest contraction, namely 30.84 percent year on year, followed by the accommodation and food and beverage sectors, which were minus 22.02 percent. Fortunately, several sectors still have positive growth, such as agriculture (2.19 percent), education services (1.21 percent), real estate (2.3 percent), health services (3.71 percent) and water supply (4, 56 percent).

The highest growth was recorded in the information and communication sector, namely 10.88 percent, which reflects the efforts to connect the aggregate supply and demand have begun using information technology alternatives. However, this method is still not sufficient to accommodate all transactions in the economy.

Also read : The “Stay-at-Home” Economy

From the expenditure side, the main source of negative growth is people’s spending. With a share of around 59 percent of GDP, the impact from a 5.51 percent contraction in people’s spending is seen directly on the GDP growth. Gross fixed capital formation (PMTB) or investment contracted by 8.61 percent. After the 1998 crisis, PMTB always grew in line with consumption demand.

The government consumption which was originally expected to compensate actually contracted 8.61 percent. This happened because of the delay in the realization of government budget expenditures. As of May, the budget realization for ministries and state institutions was 10.41 percent. This is because the bureaucracy needs to make budget adjustments from the normal budget assumption to the budget under the pandemic. In the 2021 state budget proposal, the government is determined to boost spending in the third and fourth quarters.

Also read : Speed of Recovery

KOMPAS/HERU SRI KUMORO

Finance Minister Sri Mulyani Indrawati (center left, foreground) hands over a Presidential Letter to House of Representatives (DPR) Speaker Puan Maharani (center right, foreground) at the Senayan legislative complex in Jakarta, Thursday (2/4/2020). The Presidential Letter proposed a series of legal adjustments for reallocating funding from the state budget to a Covid-19 emergency fund.

Mitigation of uncertainty

The government as an entity that integrates the system tries to reverse the situation. The indicative ceiling of state budget expenditures at several ministries and institutions shows that the government is trying to reconnect the supply side or production capacity of the economy with the demand side of the community, while simultaneously injecting new purchasing power into the circular flow of the national income.

The Public Works and Housing Ministry, which received an allocation of Rp 149.8 trillion, tries to increase people mobility. This is done by improving infrastructure for physical interaction and increasing food security through repairing and construction of irrigation. As a complement, the Transportation Ministry received Rp 45.7 trillion to strengthen the mobility of people and logistics.

Also read : Three Phases to Recovery

The allocation for the Social Affairs Ministry is Rp 92.8 trillion. However, the government also allocates social assistance for small and micro business amounting to Rp 2.4 million per business unit to maintain supply chains in the small and medium enterprises (SME) sector and their productivity. Workers or employees in the formal sector will receive a transfer payment of Rp 600,000 per month within a certain period.

The range of the projected economic growth in 2021 is quite wide, around 4.5-5.5 percent, indicating a high level of uncertainty. This range really depends on the capability of the government spending in leveraging the economy. The government can spend money, but how big the impact on the economy really depends on the size of the people’s marginal propensity to consume (MPC). If the people receiving the government social assistance put the money in deposit, while the middle class allocates bigger amount of funds in deposit, the MPC will get smaller. This means that the leverage level of government spending, including government and private investment, will have a smaller impact on economic growth.

Also read : Economy in Post-Pandemic Era

Contrary to the saying “keeping the money would make you wealthy”, in the current situation “keeping the money would lead to recession”. Too much worry about the pandemic will reduce the leverage of the government spending and the social assistance will be useless because it does not circulate in the economy. Decreasing the level of concern is a spiral process or self perpetuating that relies heavily on people’s compliance with the healthy and clean behaviors, maintaining a safe distance, avoiding crowds, wearing face masks and washing hands frequently. The higher the people’s compliance and the lower the addition of new positive cases, the more confident the community will be to carry out their activities. Mass vaccination for the prevention of Covid-19 is still far away, so the steps that can be taken temporarily are to discipline oneself to behave in a healthy and clean manner.

Keeping the money would make you wealthy.

The government has allocated Rp 14.4 trillion to expand tourism to accelerate economic recovery. The government wants to drive the flow of purchasing power, especially from the middle class, by increasing mobility while adhering to health protocols.

There is one illustration of business practice in the United States. The city of Hamptons, Long Island, in New York State, which has hotels offers customers with customized tour packages complying with the health protocols. The parents can work from the hotel so that the abbreviation work from home (WFH) changes to working from hotel, while the children can do SFH (schooling from hotel). This package can be offered for other categories, not only premium class. This kind of creativity is needed to balance health protocols and restore the economy.

ARI KUNCORO, Rector of the University of Indonesia.