COVID-19 Pressure on the State Budget

KOMPAS/ADITYA PUTRA PERDANA

People apply for cash social assistance (BST) from the Social Affairs Ministry at the office of PT Pos Indonesia in Semarang, Central Java, on Thursday (21/5/2020). Social Affairs Minister Juliari P Batubara was in attendance, and assistance was given to 94,803 beneficiary families.

The 2020 state budget realization data that was unveiled by the government recently shows great pressure from the COVID-19 pandemic. A similar situation is predicted to continue in 2021.

This pressure is reflected in a drop in tax revenues, the sharp increase in debt financing and the high unused amount of funds (SLIPA) during 2020 (Kompas 7/1/2021).

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It is predicted that the pressure on the state budget will continue in 2021 with high uncertainty, especially with the growing trend of new COVID-19 cases even though vaccine supplies have started to arrive.

One thing is for sure, the budget for the national economic recovery program (PEN) – which will still be continued in 2021 – is projected to increase from Rp 372.3 trillion (US$26.22 billion) to Rp 403.9 trillion. The increase is due the government’s decision to make COVID-19 vaccination free of charge for the public.

Not to mention the various financial stimulus for micro, small and medium enterprises and corporations.

The government will also continue a wide-scale social protection program in 2021, including the Family Hope Program, Basic Food Cards, Village Fund Direct Cash Assistance, and Cash Social Assistance. Not to mention the various financial stimulus for micro, small and medium enterprises and corporations.

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The high amount of expenditures to finance COVID-19 mitigation efforts has also resulted in an increase the state budget deficit projection from the initial target of 3.21-4.17 percent of Gross Domestic Product (GDP) to 5.7 percent of GDP. The large-scale social restrictions (PSBB) that the government will implement in 2021 also threaten the 2021 tax revenue target.

The increase in government debt has basically been predicted from the start, as a logical consequence of the counter-cyclical fiscal policy taken to deal with COVID-19 and to overcome the impact of the pandemic on the economy. The 180.4 percent increase in debt financing in 2020 occurred in line with the increasing need of funds to deal with the impact of COVID-19 and the PEN program.

Kompas/Bahana Patria Gupta

Residents crowd the Sidoarjo City Post Office in East Java on Thursday (11/6/2020), the last day before the deadline to receive cash in the first phase of a social aid program from the Social Affairs Ministry. The residents ignored Covid-19 health protocol by jostling while waiting in line. Within two days, the post office had to disburse cash assistance to 9,000 beneficiary families in Sidoarjo.

The decline in tax revenues by 19.7 percent year-on-year (yoy) to only 89.3 percent of the target of Rp 1,119.8 trillion was in line with the economic contraction and the provision of various tax incentives to cope with the impact of the pandemic, which had resulted in a loss of potential tax revenue. As for the high amount of the unused funds, it was more due to the difficulty in managing uncertainties.

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Apart from the harsh impact of the pandemic pressures and the widening of the state budget deficit, there was also an inadequate use of space for existing fiscal expansion as seen in the suboptimal growth in government spending and the low realization of the disbursement of the funds for the economic recovery program, which was only 83.4 percent of Rp 695.2 trillion.

The government has already thought about the exit policy from the fiscal pressure situation due to the pandemic. Gradually, the state budget deficit – based on government regulation in lieu law (Perppu) No. 1/2020, which was passed into Law No. 2/2020 – will be reduced and projected to return to a level below 3 percent in 2023. In reality, the deficit reduction cannot be done as quickly as expected. The sooner we get out of the health crisis, the sooner we can return to a high rate of economic growth.

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So far, according to assessments of various institutions, Indonesia\'s debt is still safe and sustainable. Apart from being still below the upper limit of 60 percent stipulated by law, debt is also dominated by domestic debt. External debt is generally long-term debt. This is why maintaining the policy credibility and market confidence is very important.

(This article was translated by Hendarsyah Tarmizi).