Fiscal Consolidation Becomes a Challenge

BIRO KOMUNIKASI DAN LAYANAN INFORMASI KEMENTERIAN KEUANGAN

(From left to right) Minister of Transportation Budi Karya Sumadi, Minister of Social Affairs Tri Risma Harini, Minister of Finance Sri Mulyani Indrawati, Coordinating Minister for Economic Affairs Airlangga Hartarto, and Minister of Health Budi Gunadi Sadikin at a press conference on the Financial Note and the 2022 State Budget Bill on Monday (16 /8/2021).

JAKARTA, KOMPAS — The prolonged COVID-19 pandemic has slowed down the fiscal consolidation process. The draft 2022 state budget (RAPBN) is considered to lack the foundation to support fiscal consolidation in 2023.

One form of fiscal consolidation is to bring back the state budget deficit to a maximum of 3 percent of gross domestic product (GDP) in 2023 as initially targeted. Based on Law No. 2/2020 concerning state financial policy and financial system stability for handling the COVID-19 pandemic, the state budget deficit is allowed to exceed the 3 percent threshold only in the 2020-2022 period.

When presenting the draft 2022 state budget at the House of Representatives on Monday (16/8/2021), President Joko “Jokowi” Widodo said the 2022 budget was projected at Rp 868 trillion (US$60.27 billion) or 4.85 percent of GDP. According to the President, the draft 2022 state budget was prepared as a step to support fiscal consolidation in 2023, with the budget deficit returning to a maximum level of 3 percent of GDP.

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Bank Permata\'s chief economist, Josua Pardede, said in Jakarta on Tuesday (17/8) that it would be difficult for the government to reduce the state budget deficit to below 3 percent of GDP in 2023 .

Josua said the budget deficit would gradually decline but it would be difficult to bring it back immediately to within the 3 percent threshold. In the process of economic recovery, state revenues from taxes cannot be increased quickly. On the other hand, government spending also cannot be reduced significantly. As it would be difficult to lower the state budget deficit within the 3 percent legal limit in 2023, Josua suggested that the government and House members reconsider the fiscal consolidation target.

KOMPAS/RADITYA HELABUMI

Some visitors download the "Peduli Lindungi" application to show a vaccination certificate when they enter Seasons City Mall, West Jakarta, Monday (16/8/2021). Within this week, a trial for the new normal by gradually opening up economic activity has begun. One of them is the opening of shopping centers and export-based industries.

Healthy and effective fiscal

Finance Minister Sri Mulyani said the budget deficit in 2022 was projected to decline to 4.85 percent of GDP because state spending would be still relatively high, ranging from 14.69 to 15.3 percent of GDP, while state revenue would be only between 10.18 percent and 10.44 percent of GDP.

According to Sri Mulyani, the government is committed to continuing to manage a healthy and effective fiscal policy so that it can support sustainable and equitable economic growth.

“Next year\'s primary balance is projected to be between negative 2.31 percent and negative 2.65 percent of GDP. Then, the level of the government’s debt-to-GDP ratio is at the range of 43.76 to 44.28 percent," Sri Mulyani said.

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She added that the focus of the draft 2022 state budget was to support economic recovery and structural reforms. Nevertheless, the handling of the COVID-19 pandemic remained an important

consideration in designing the 2022 state budget, she said. Therefore, in the 2022 state budget, the government still allocated extra spending to support COVID-19 mitigation efforts and vaccination programs.

Although we hope that it will not happen, the state budget must be prepared in case something happens against our will.

The government has also designed an automatic budget reallocation scheme in the draft 2022 state budget to ensure that there would not be a disruption if there was another resurgence of new COVID-19 cases, like what happened at the beginning of the third quarter of 2021 following the emergence of the Delta variant.

"Although we hope that it will not happen, the state budget must be prepared in case something happens against our will," Sri Mulyani said.

Meanwhile, Coordinating Economic Minister Airlangga Hartarto said consumer spending was expected to remain the main driver of economic growth in 2022. Household spending is expected to grow thanks to the expansion and improvement of social protection programs for the middle- to lower-income people.

"On the other hand, the government is committed to continuing national strategic projects that have a multiplier effect on the economy," he said.

This article was translated by Hendarsyah Tarmizi.