13. Fiscal Policy SA - Feb 2014

8/12/2019 13. Fiscal Policy SA - Feb 2014

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FISCAL POLICY

Fiscal Policy is governments policy regarding level ofspending and revenue.

Fiscal Policy describes the behavior of governments inraising revenue to fund current spending and fortransfer payments to citizens for which thegovernment is responsible.

The revenue can be raised by taxation or borrowing.

Fiscal policy affect macroeconomic variables such as

employment, the price level, and the level of GDP.

THEOBJECTIVES OFFISCALPOLICY:

To ensure macroeconomic stability

To allocate government fundTo improve income distribution


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GOVERNMENTBUDGET1997/1998(BILLIONS RUPIAH)

Revenues Budget Expenditures Budget

I Routine

(Domestic Revenue) 88.061 I Routine 62.159

II Development 13.026 II Development 38.928

1. Programs Aid - 1. Rupiah Financing 25.902

2. Projects Aid 13.026 2. Projects Aid 13.026

Total Revenue (I+II) 101.087 Total Expenditure (I+II) 101.087

Source : BPSSource : BPS

Simple Form of Balance BudgetSimple Form of Balance Budget

THEIMPACT OFBUDGETBALANCE

Indonesia has been achieved normal inflation sincebalance budget was implemented in 1967. Inflationrate dramatically decrease from 639 percent (1966) to3,9 percent (1971).


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REVENUE

The revenue is dominated by the changing relative

importance of the three main aggregates: oil and gas

revenue, other domestic revenue (non-oil domestic

revenue), and foreign aid

DOMESTICREVENUE, 1970 - 2005 (INTRILLIONSRUPIAH)

*2005 : Revised APBN*2005 : Revised APBN

Source : Financial Notes, Indonesia GovernmentSource : Financial Notes, Indonesia Government


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DOMESTIC REVENUE, 2006 - 2012 (IN BILLION RP)

Source : Financial Note and Indonesia Proposed Bugdet Fiscal Year 2012

KEYROLE OFOIL ANDAID

The change of oil price produced a major change inrevenue composition.

Since mid 1970s until the early 1980s, oil and gaswas the major source of domestic revenue.

By 1986, the low point in international prices, oilsshare had fallen to 29 percent, less than one-half of

that its maximum in 1981. During this period, theaid revenues rose sharply. As a share of governmentrevenue, the increase were sharper still, from 15percent in 1985 to 26 percent in 1986 and 30percent in 1988.

During the oil boom period, aid funded anincreasingly small percentage of the developmentbudget.


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DOMESTIC REVENUE STRUCTURE (%), 1970 - 2005


Source : Financial Notes, Indonesia Gov ernmentSource : Financial Notes, Indonesia Gov ernment

DOMESTIC REVENUE STRUCTURE (%), 2006 - 2012



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TAX REFORMS

The reforms introduced in 1984-1985 was an attemptto produce more efficient, buoyant, and clean taxsystem

Simplify income and company taxation ratesInvestment incentives were largely abolishedCapital gains were taxed in 1990The sales tax system was discarded in favor of value

added tax, introduced progressively from 1985 andself enforcing in nature

Comprehensive land and building tax (PBB, Pajak Bumidan Bangunan) was introduced in 1986

TAXREVENUE, 1975 - 2005 (IN TRILLION RP)




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TAX REVENUE, 2006 2012 (IN BILLION RP)


SourceSource:: MinistryMinistry ofof FinanceFinance

TAX RATIO (% to GDP), 1998 - 2005


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TAX RATIO (% to GDP), 2006 - 2012

EXPENDITURE

Real government expenditure rose very sharply in 1970s,response to the oil revenue and aid inflows. Thegovernment allocated an increasing proportion of itsbudget to development expenditure (20% in 1980s to 56%at the height of oil boom in 1976)

The rising proportion of funds spent on developmentproject over this period corresponded to the decliningimportance of aid as a source of development expenditure

In the early years of the New Order, civil servantssalaries dominated the budget, accounting for almosthalf of the total


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Debt payments began to rise sharply from the late

1970s, quadrupling in nominal terms from 1977 to 1981,and again in 1982 to 1986.

In Repelita I (1969), the budget was dominated by basicinfrastructure and sectoral development (agriculture,industry/mining, and communications), absorbing over70% of the total.

In Repelita II, agriculture was the most important sector(receiving over 30% of the total). Regional developmentexpenditure and state enterprise investment began tofigure prominently.

In 1979 (six years into oil boom), the five sectorsretained their importance (industry and mining andenergy were subdivided), but new priorities emerged(defence, education, and labor and transmigration).

MAJORCOMPONENT OFROUTINEEXPENDITURE1970 1999 (INBILLION RUPIAH)



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MAJORCOMPONENT OFDEVELOPMENTEXPENDITURE

1970 1999 (BILLION RUPIAH)


FISCAL REFORM POLICY

fiscal reform policy including a change of budgeting system

that had been applied in 2005 as the implementation of the

Law Number 17 Year 2003 regarding State Finances.

the budgeting system reform was an integral part of fiscal

reform package and financial management which wasregulated in financial regulation package that included :

1. Law Number 17 Year 2003 regarding State Finances

2. Law Number 1 Year 2004 regarding Treasury

3. Law Number 15 Year 2004 regarding Management Audit

and Financial Accountability

therefore, as of 2005, central government expenditure was

arranged, implemented and liable in financial reform

implementation framework as stated in the above three

laws.


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In relation with the planning and implementation of

central government expenditure, there were basic changes

that were regulated in Law Number 17 Year 2003, which

related to the three pillars of expenditure budgeting that

included:

1. unified budget

2. performance based budgetting

3. medium term expenditure framework

to create the three pillars of expenditure budgeting above,

the Government had set introduction strategy that hadbeen carried out during 2005 - 2009; consolidation strategy

during 2010 - 2014; and perfection strategy that was

scheduled for 2015.


The implication of unified budget approach in expenditure

budget system reform was not to separate the current

expenditures from development expenditures in planning

and implementation of central government expenditure

since 2005.

Since 2005, budgeting was carried out in an integrated

manner between programs/activities and expenditure types

in line ministries and their entire business units

responsible for both assets and duties.

Other than that, in the unified budget system, the central

government expenditure allocation was detailed by

organization, function and type of expenditure.



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PROGRESS OF CENTRAL GOVERNMENT

EXPENDITURE, 2006 2012 (IN TRILLION RP)


FISCALCONDITIONDURINGCRISIS

The severe economic crisis in 1997 left the Indonesiangovernment with a huge amount of debt, primarily due tothe recapitalization of the banking system, which cost abouthalf of annual GDP (Rp 650 Trillion).

In addition, the burden of servicing the external debt rose

sharply due to the rupiahs depreciation, and to a lesserextent some increase in foreign borrowing. Totalgovernment debt, both domestic and external, rose from 25%of GDP at end-1996 to 99% by end-2000.

This large debt burden has threatened Indonesias economicrecovery and put fiscal sustainabilityat risk.


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FISCALPOLICYPOSTCRISIS

Government is trying to achieve fiscal sustainability. As a result ofthe crisis the debt accumulated, increasing fuel subsidy and theimpact of decentralization lead to unsustainable budget (deficit isgrowing). The Increasing domestic debt mainly are from bankingrecapitalization and liquidity support.

Fiscal Consolidation

- Lowering budget deficit

- Lowering debt burden

Sources: Ministry of Finance and Annual Report CentralSources: Ministry of Finance and Annual Report Central Bank of IndonesiaBank of Indonesia

FISCAL CONSOLIDATION (% to GDP), 1997 - 2004


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FISCAL CONSOLIDATION (% to GDP), 2006 - 2010


Gambar 11. Surplus/Defisit APBN

-50,000

-40,000

-30,000

-20,000

-10,000

0

10,000

-3.00%

-2.50%

-2.00%

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

1995/96

1996/97

1997/98

1998/99

1999/00

2000

2001

2002

2003

2004

2005

2006

Budget Surplus/Deficit (Billions Rupiah) Percentage to GDP

Gambar 12. Tax Ratio

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

199

0/91

199

1/92

199

2/93

199

3/94

199

4/95

199

5/96

199

6/97

199

7/98

199

8/99

1999

/00

2000

2001

2002

2003

2004

2005

2006

Billi

ons

Rupia

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

TAX REVENUE GDP TAX RATIO (right ax is)

Sumber: Nota Keuangan & APBN, diolah


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PROGRESS OF APBN DECIFIT, 2006 2012



PROGRESS OF TAX REVENUE, 2006 2012


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SEVERALPOLICIES TOACHIEVESUSTAINABLEBUDGET

Improving Budget management by risingrevenues and cut wasteful spending. Reform ofbudget process, improving procurement andtax reform.

Phasing out subsidies.Privatization and asset recovery, several BUMN

had already privatized and IBRA sold someassets from banking recapitalization.

Issuing government bonds to place in thedomestic as well as international market.

FISCAL POLICIES DURING GLOBAL

ECONOMIC CRISIS 2008

Fiscal stimulus in government income and

expenditure through some instrument such as:

- maintain purchasing power

- support business in facing global crisis- support job creation (build

infrastructure)

- ext


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STATE BUDGET, 1970 2005 (IN BILLION RP)

Source : Financial Notes

STATE BUDGET, 2006 2012 (IN BILLION RP)

Source : Budget Statistic 2006 2010, Ministry of Finance


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SURPLUS/DEFICIT, 1970-2005(IN BILLION RP)

Source : Nota KeuanganSource : Nota Keuangan

SURPLUS/DEFICIT, 2006 2012 (IN BILLION RP)



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BUDGET SUMMARY, 2006 2012

(IN BILLION RP)


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13. Fiscal Policy SA - Feb 2014