Progressive Fiscal Policy

KOMPAS/SHARON PATRICIA

Opposition Leaders Economic Forum bertemakan “Selamatkan Ekonomi Indonesia di Tengah Krisis Covid-19” di Auditorium Perpustakaan Nasional Republik Indonesia, Jakarta Pusat, Jumat (13/3/2020).

A progressive fiscal policy is the antithesis of a conservative policy. Since the start of the COVID-19 pandemic, fiscal policies in almost all countries have become more progressive. Fiscal stimulus has played a key role in supporting the economy, particularly through increased spending on health and social protection.

McKinsey published a report in June 2020 on the government\'s response to the COVID-19 pandemic. In just a few months, the stimulus funds had reached a total of US$10 trillion, far larger than those provided during the 2008-2009 financial crisis. Even in some developed countries, the amount was dozens of times higher. Germany, which only provided stimulus funds amounting to 3.5 percent of gross domestic product (GDP) during the 2008 financial crisis, allocated stimulus funds equivalent to 33 percent of GDP in 2020. In Japan, the stimulus funds accounted for 2.2 percent of GDP in 2008 and 21 percent of GDP in 2020. While in the United States, the amount was equivalent to 4.9 percent of GDP in 2008 and it jumped to 12.1 percent of GDP in 2020.

Meanwhile, in the draft 2022 state budget, the government has allocated Rp 699.4 trillion for the economic recovery program.

In coping with the pandemic, the Indonesian government has also issued an extraordinary policy that allows the fiscal deficit to exceed 3 percent of GDP. In 2020, the government allocated Rp 692.5 trillion ($48.20 billion) to finance the National Economic Recovery (PEN) program. The amount was further increased to Rp 755.77 trillion in 2021. Meanwhile, in the draft 2022 state budget, the government has allocated Rp 699.4 trillion for the economic recovery program.

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Fiscal stimulus must be focused, targeted and temporary. However, in a difficult situation full of uncertainties, the stimulus funds cannot be immediately stopped. A comprehensive and long-term plan is needed to promote the proper fiscal role in the economy. Crises always bring innovation, especially in the government’s role in providing social protection.

Welfare state

In the March 4 edition of The Economist, there was an editorial about the transformation of the welfare state as a result of the pandemic. There are so many people who have been unable to cope with the crisis. The state has also introduced fiscal policies to directly help people affected by the crisis. From the experience of many countries, there are two main approaches in the provision of fiscal stimulus, namely direct transfers to the public or through sectoral (corporate) rescues. The first approach encourages public consumption, while the second approach supports the production side.

Kompas/Wawan H Prabowo

People prepare to board a bus on 28 March 2020 at Pasar Lembang Terminal in Tangerang municipality, Banten. Despite calls for the public not to go on mudik (exodus) for Ramadhan and Idul Fitri this year to help curb the spread of Covid-19, many people are heading back to their hometowns amid their loss of income due to the partial lockdown in the city. The physical distancing and work from home policies have halted economic activities in urban centers like Jakarta, particularly in the informal sector.

Developed countries, with large stimulus expenditures, are able to sustain both. That\'s why many companies live only by relying on stimulus (zombie companies).

In the 2008 financial crisis, many companies went bankrupt. In the current crisis, the government provides various stimulus packages so that many companies just go into "hibernation".

A number of economic thinkers believe that resuscitating the economy through an increase in consumption is more appropriate. Christina Romer of the Brookings Institution estimated that the largest portion of the US fiscal stimulus of about S$5 trillion provided through various schemes was in the form of direct transfers to the public. This is one of the reasons why the US economy, despite experiencing the worst crisis in history, became the fastest to recover.

The International Monetary Fund (IMF) in the World Economic Outlook report published in July raised the US economic growth estimate to 7 percent from 6.4 percent in April. Although the global growth projection remains at 6 percent, the growth profile of developed countries is better, while in developing countries, the condition is weakening. This is the first time that developed countries have had a growth profile higher than the global average. In addition to access to vaccines, the size of the stimulus, especially stimulus provided directly to boost consumption, is considered the main factor of the high growth in developed countries.

On a different scale, our government also focuses the fiscal stimulus on social protection rather than on the private sector. That is one of the fundamental differences with the 1998 crisis. The stimulus at that time was mostly allocated for banking rescue through Bank Indonesia Liquidity Assistance.

In 2021, spending on health and social protection accounts for 53 percent of the PEN fund. In the draft 2022 state budget, health and social protection funds are projected to account for 45 percent of the total PEN fund.

The largest part of the PEN funds in 2020 went toward social protection, amounting to Rp 230.21 trillion. If we add this to the Rp 99.50 trillion allocation for health care, the sum accounts for 47 percent of the total PEN fund. In 2021, spending on health and social protection accounts for 53 percent of the PEN fund. In the draft 2022 state budget, health and social protection funds are projected to account for 45 percent of the total PEN fund. The health funds are mostly intended to support vaccination, while social protection funds are allocated to various social assistance programs, such as the Family Hope Program, the Staple Food Card, the Cash Assistance program, the Pre-employment Card and wage subsidies.

With the large amount of the fiscal stimulus directed toward the welfare of society, The Economist offered a discussion on the return of the "welfare state". With technological advancement, the state has the opportunity to carry out social protection efforts more effectively through technological assistance. The government has begun to distribute social assistance through digital networks, by cooperating with digital payment companies such as OVO, GoPay, DANA, LinkAja and PT Pos Indonesia.

KOMPAS/PRIYOMBODO

Online motorcycle taxi drivers show customer food orders through an application at Grab Kitchen Tendean, South Jakarta, in late October (29/10/2019). Grab Kitchen is an effort to bring customers closer to their favorite local dishes produced by micro, small and medium enterprises (MSMEs) through online food delivery services. Digital economic growth also helps MSMEs grow and develop.

The private sector, especially digital-based companies, has been actively involved in the implementation of social protection in recent years. Philip Alston, UN rapporteur on extreme poverty, noted how technology drastically changed government-community interactions through social protection programs channeled through digital ecosystems. He popularized the term digital welfare state. In the future, fiscal policy needs to be integrated into a more systematic social security system that also includes institutionalization, legal frameworks, coordination and implementation to enable the involvement of the digital ecosystem with a platform approach.

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In facing the potential for COVID-19 to become endemic, as well as the environmental crisis, the state\'s presence in a progressive fiscal policy can no longer be avoided. Therefore, a fiscal policy road map is needed to realize the (digital) welfare state in Indonesia.

A. Prasetyantoko, Rector of Atma Jaya Catholic University.

(This article was translated by Hendarsyah Tarmizi).