In order to pursue GDP growth, the government is still increasing the budget despite declining state revenues.
The logical consequence is that the budget deficit would swell from the target of 2.41 percent to 2.6 percent, which has to be covered by borrowing money. The government is also forced to reduce the General Allocation Funds for regions.
We have to recognize that the fiscal stimulus through government spending, especially for infrastructure, plays an important role in stabilizing and driving the domestic economy. Over the last several years, we have also seen fiscal sustainability and continuity tested amid an unfavorable global situation and a domestic economy that remains sluggish, even though breakthroughs have been achieved, including through a tax amnesty.
Even though the government has been able to safeguard the state budget properly –as was confirmed, among other ways, by an improvement of the government debt ranking conferred by Standard&Poor\'s—we are constantly faced with mounting fiscal pressure that could undermine investor confidence if it is not handled carefully. The fiscal elbow room is limited and a swelling deficitis only one of the threats.
In a situation of depressed state revenues, the government is faced with a choice ofcontinuing to promote expansion, or slightly putting the brakes on growth. From the economic targets of 5.3 percent in 2017 and 5.4 to 6.1 percent in 2018, we see the government\'s determination to maintain the growth momentum, especially because it is related to the provision of employment and the reduction of poverty and inequalities.
This is not an easy task at a time when 60 percent of the central government’s budget isused for routine expenditures. Half of the budgetsof regional administrations are used to pay salaries and allowances for the civil servants.Also, debt repayments require about 37 percent of the state revenues.
The one thing that is blamed for the magnitude of the state budget gap is infrastructure spending. Aside from being the main program of President Joko “Jokowi” Widodo’s administration, infrastructure projects have become a government priority because they are considered to be able to drive the economy as a whole, which would help Indonesia catch up with other countries.
However, with the weight infrastructure puts on the large state budgets, the hope that the governments would be more selective and focus on projects thathave multiple economic effects has seemingly not been ignored.
Sharpening the overall budget allocations, improving dispersion and reducing leakage, have to continue. The growth momentum will be maintained more properly if we are also able to keep all economic mechanisms operating optimally and can maintain a conducive business climate. Moreover, we also have to be able to take advantage of the improved debt ratings to attract investment and reduce funding costs.
