Understanding Government Debt
Over the past few months, a number of parties have criticized President Joko "Jokowi" Widodo and Finance Minister Sri Mulyani Indrawati over rising government debt in the last three years.
Over the past few months, a number of parties have criticized President Joko "Jokowi" Widodo and Finance Minister Sri Mulyani Indrawati over rising government debt in the last three years.
The debt, which has reached Rp 4,407.05 trillion (2017), is considered very risky and endangers the state finances. President Jokowi\'s policy of increasing the infrastructure development budget is deemed to be plunging the country into serious financial difficulties. Therefore, a number of parties, including former President Susilo Bambang Yudhoyono (SBY), have urged President Jokowi to immediately control the government debt, so as not to throw the country into a serious crisis in the future.
Is that demand realistic? To answer that question, I am doing an analysis on the Central Government Financial Report (LKPP) in the 2008-2017 period. The analysis shows that the demand is unrealistic and very difficult to implement. Why?
The trend of government debt
According to the analysis, government debt has increased from year to year over the last 10 years. During the SBY-Boediono administration (2009-2014), the debt increased from Rp 1,693.69 trillion (2008) to Rp 2,898.38 trillion (2014), rising by Rp 1,204.69 trillion (71.13 percent).
Meanwhile, within the three years of the government of Jokowi and Jusuf Kalla (2015-2017), the government\'s debt continued to rise to Rp 4,407.05 trillion (2017), an increase of Rp 1,508.67 trillion (52.05 percent). In other words, from the amount of government debt at the end of 2017, 65.77 percent is the legacy of the SBY-Boediono administration and previous governments.
The leverage analysis shows that the position of debt-to-assets ratio (DAR) of the government during the last 10 years was also very high. In 2008, the government\'s DAR was 82 percent, before falling to 74 percent (2014). During the 2015-2017 period, the DAR declined to 68 percent (2015), but rose again to 71 percent (2016) and 74 percent (2017). From the magnitude of the DAR, it can be seen that the burden of the Jokowi-Kalla government in managing the debt is very heavy. The potential for the government to experience financial difficulties in paying back maturing debt appears to be enormous.
The crucial question is, why is the government debt so large and why does it continue to swell year by year? What is the main reason for this?
The reason is that the accumulated deficit of the state budget (APBN) keeps increasing from year to year. During the era of SBY-Boediono (2009-2014), the state budget was always in deficit, as actual expenditure was always greater than actual revenue. In 2009, the budget deficit amounted to Rp 88.62 trillion (10 percent), and it increased to Rp 226.69 trillion in 2014. Then, in the Jokowi-Kalla era, the APBN deficit increased to Rp 298.49 trillion (2015), then to Rp 308.34 trillion (2016) and finally to Rp 345.8 trillion (2017).
Because the state\'s cash reserves were very limited, the government applied a debt policy to cover the deficit. For example, the 2009 state budget deficit was covered with a debt of Rp 112.58 trillion and the deficit of the 2014 state budget with a debt of Rp 248.89 trillion. Meanwhile, the 2015-2017 state budget deficits were closed respectively with debts of Rp 323.1 trillion, Rp 334.4 trillion and Rp 340.97 trillion.
Because the state budget was always in deficit and the gap was covered by debt, the accumulated government debt rose significantly from 2009 to 2017. So, it is very wrong if a number of parties just blame the Jokowi-Kalla government in connection with the magnitude of the current government debt burden.
The next crucial question is whether the state budget deficit can be covered with sources of income other than debt. The answer to this question is very difficult.
The reason is that the cash reserves and cash equivalents and liquid securities owned by the government every year is not sufficient to cover the deficit of the state budget, which is getting bigger. Even current assets are unable to cover short-term debt that must be paid immediately. The current ratio, namely the current assets divided by current liabilities, for the 2012-2017 period was always below 1, meaning it was not enough to pay short-term debt that must be paid directly. That is why, every year, the government proposes new debt in an amount larger than the APBN deficit. The excess is used to cover the shortfall of short-term debt payments in the current year period.
Understanding the deficit of the state budget
It is worth noting that the reason for the state budget deficit to continue to swell is that, since the initial drafting of the state budget, the government and the House of Representatives have agreed to adopt a deficit policy system, namely that the targeted budget is greater than the revenue. For example, the 2009 state budget deficit target was Rp 132 trillion, while in the 2014 state budget, the target was Rp 241.5 trillion. In 2015, policymakers targeted a state budget deficit of Rp 257 trillion, while the 2017 state budget targeted Rp 397.2 trillion.
The actually realized state budget deficit may be higher or lower than the target. For example, the realized state budget deficit in 2009 and 2014, respectively, came in at Rp 87.2 trillion and Rp 227.4 trillion. Meanwhile, in 2015 and 2017, the deficit was Rp 318.5 trillion and Rp 340.97 trillion. From a financial perspective, the realization of the deficit in the 2013-2017 state budget actually increased significantly, from 14.6 percent (2014) to 19.8 percent (2015-2016) and 20.5 percent (2017).
The question is: Can the government significantly reduce the state budget deficit by pressing the expenditure posts and increasing the state revenue points? The answer is very difficult. Why?
The state budget analysis for the period of 2008-2017 shows that the realized revenue has increased from 2009 (Rp 848.76 trillion) to 2014 (Rp 1,550.49 trillion), then decreased in 2015 (Rp 1,508.02 trillion) and increased again in 2016 (Rp 1,555.93 trillion) and in 2017 (Rp 1,666.37 trillion). However, the upward trend was much lower than the trend of the increasing state expenditure. As a logical consequence of the significant increase in infrastructure budgets over the 2015-2017 period, the gap between state revenue and state spending widened. That is why the state budget deficit kept swelling and undermining the state’s net equity funds.
The relatively small increase over the last 10 years suggests that the option to increase revenue significantly in the 2018-2019 period is very difficult to realize by President Jokowi. Meanwhile, controlling the increasing state expenditure also seems very difficult in the 2018 and the 2019 state budgets, because state expenditure over the 2008-2017 period continued to increase from year to year.
Moreover, eliminating or streamlining a number of state expenditure posts, especially with regard to crucial and strategic items, would have very complex negative implications economically and socio-politically for the nation and state. Therefore, President Jokowi will certainly not take the option to control the debt by pressing the state expenditure. Besides endangering the nation and state, such a choice would also endanger Jokowi’s bid for the 2019 presidential election.
For strategic investment
From the above description it can be concluded that the demand by a number of parties for President Jokowi to control government debt is unrealistic and difficult to implement. Besides the weak financial position and financial performance of the government, President Jokowi is also determined to continue to realize his government\'s nine priority programs in an effort to build, advance and transform Indonesia into a developed, prosperous, just and self-reliant nation based on Pancasila values.
The realization of this commitment requires enormous funds. Due to the limited state revenue sources, development financing through debt becomes the best solution.
Moreover, it is very unlikely for President Jokowi to stop the construction of planned strategic infrastructure projects just because of increasing government debt constraints. For Jokowi, debt is the best solution for strategic investment in an effort to advance the nation and transform Indonesia into a developed country.
Strategic investment is also intended to significantly increase state revenue and financial surpluses in the future. Therefore, the state will have a solid financial position to pay off debts, finance routine spending and invest in building the nation.
One also needs to note that the significant increase in annual government debt during the 2015-2017 period was not only used to cover the budget deficit and pay the annual debt. The debt was also used to finance long-term strategic investment in an effort to boost the nation\'s progress and the welfare of the people throughout Indonesia. Massive infrastructure development, which is almost evenly distributed throughout Indonesia, is one form of strategic investment.
That, for example, is reflected in the rise of long-term investment. In the Central Government Financial Report in the 2008-2017 period there was a significant increase in long-term investment from Rp 1,309.92 trillion in 2014 (up 10.69 percent) to Rp 2,223.8 trillion in 2015 (up 69.77 percent) and to Rp 1,411.82 trillion in 2016 (up 8.5 percent) and Rp 2,640.04 trillion (up 8 percent).
The value of fixed assets and other assets also continues to rise significantly. In the 2018-2019 period, the increase in strategic investment will be even greater, because earmarked spending on infrastructure investment and other strategic projects in the 2018-2019 state budget continue to rise.
Andreas Lako, Professor of Accounting; Head of Doctoral Program of Environmental Sciences of Soegijapranata Catholic University, Semarang