State Budget for the People’s Welfare

Editor\'s Note

Kompas held an economic discussion with the theme "2022 State Budget for Growth and Equitable Welfare". The panelists included the rector of Atma Jaya Catholic University (Unika) Jakarta, A. Prasetyantoko; SMERU Research Institute researcher Athia Yumna; the head of the Finance Ministry’s Fiscal Policy Agency, Febrio N Kacaribu; and lecturer at the University of Indonesia’s School of Economics and Business, M Chatib Basri.

The Covid-19 pandemic has forced many countries to change their fiscal policies. The Indonesian government has also changed its fiscal policies to cope with the impact of the pandemic on people\'s health and welfare. Law No. 2/2020 was issued to allow the state budget deficit to exceed 3 percent of the Gross Domestic Product (GDP) for three years.

The 2022 draft state budget is important because it will begin to gradually bring back the state budget deficit to the 3 percent threshold by 2023. The state budget deficit is projected to decrease from 6.14 percent of GDP in 2020 to 5.82 percent in 2021 to 4.85 percent in 2022.

This projection is based on the assumption that the world must live with the Covid-19 pandemic. Vaccination is believed to be able to overcome the impact of Covid-19. If the number of people who have been vaccinated exceeds 70 percent, in addition to those who have been infected with Covid-19, there will herd immunity. World Bank data shows that countries that have vaccinated most of their population have their economies recover more quickly, with a V-shaped pattern.

Structural reform

The government has said it will carry out structural reforms with a focus on building physical and human capital. The challenges are the availability of funding and avoiding an uneven economic recovery with a K-shaped pattern.

In such a situation, as a medium and long-term option, it would be better to build human capital rather than high-cost physical projects, such as high-speed trains, the new capital city and the purchase of major weapons systems. The impact of building human capital is more sustainable and inclusive and will enable Indonesia to take advantage of the demographic dividend.

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Like in structural and fiscal reforms, there will be need to be a focus on building a social protection system (Perlinsos) that is sustainable and adaptive to shocks. The allocation of direct cash transfers can be expanded to cover 160 million people from vulnerable groups and the aspiring middle class. They are vulnerable to poverty and must continue to work despite strict social restrictions during the pandemic because Indonesia does not provide social security for people who do not work.

The amount of monthly social aid has been increased from Rp 300,000 (US$21.40) to between Rp 1 million and Rp 1.5 million per month per family, which is sufficient for a decent living but does not discourage people from working. The structural reforms of the social protection system must be supported with the availability of accurate data that has to be regularly updated. A digital ecosystem must also be built to help drive economic growth. The provision of the social protection involving 11 ministries and institutions must be simplified in order to reach the targeted recipients on time.

KOMPAS/FERGANATA INDRA RIATMOKO

Residents queue to collect cash social assistance (BST) at the Great Post Office, Yogyakarta, Monday (16/8/2021). BST in the form of 10 kilograms of rice. The assistance was given to ease the daily needs of the community during the pandemic.

Although the state budget deficit of 6 percent of GDP is considered by some to be too small to save the economy, the spending for health and social welfare has been able to curb the increase in the number of poor people. As of the second quarter of 2021, poor people accounted for 10.19 percent of the popular, higher than 9.22 percent recorded in September 2019, but lower than the World Bank\'s estimate of 11.2 percent.

The government\'s plan to lower the state budget deficit in 2022 could result in a decline in spending for health and social welfare. On the other hand, the government is faced with rising debt. During the 1998 Asian financial crisis, Indonesia\'s economic recovery was very slow when the International Monetary Fund (IMF) forced the government to cut the budget deficit sharply.

The government\'s plan to increase state revenue by expanding the tax base should be reconsidered. Raising taxes can be a disincentive to public consumption and private investment, as has happened in several economic zones. The alternative is to improve tax administration.

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Several important achievements can serve as a reference in restoring the economy while maintaining the health and social protection budget. The Social Safety Net program was introduced during the 1998 financial crisis while the National Social Security System was implemented through Law No. 40/2004. In 2005 and 2012, the government lowered fuel subsidies amid the pros and cons. The funds saved from the cuts in the subsidies were used for social welfare.

Solving the pandemic

Ultimately, the key to economic recovery is overcoming the pandemic. As long as social restrictions continue, investment growth will remain low due to weak demand. Other economic activities have also slowed.

Structural and fiscal reforms should be carried out in a timely manner, considering 2024 is a political year. It is estimated that fundamental and accountable reforms will receive a lack of support from political parties because they will be focusing on how to attract voters. Social protection could, instead, become a political commodity.

The government is faced with difficult choices. Decisions must be made based on a reliable data that must be regularly updated. The pandemic will have a long-term impact on human capital, especially children and pregnant women who are malnourished, deprived of vaccinations and basic health services. Shocks that may occur due to natural disasters and climate change must also be taken into account in development planning.

This article was translated by Hendarsyah Tarmizi