F

iscal stimulus is a popular phrase now in many countries in the world. In the United States, the Obama government is planning to implement a US$30 billion infrastructure stimulus in an effort to jumpstart the economy.

In Indonesia, fiscal stimulus is a term tantamount in popularity to political campaigns at the moment. Headlines are filled with references to new expenditures to shield Indonesians from the global slowdown.

The Indonesian government is planning to spend Rp 50 trillion ($4.25 billion) on a fiscal stimulus package to support domestic economic growth and avoid further layoffs.

The global economic recession is forcing the government to concentrate the stimulus in supporting Indonesian's purchasing power.

As in the United States, domestic consumption is important, accounting for close to 65 percent of Indonesia's gross domestic product. To understand why it is imperative that Indonesians continue to spend their income on domestic products, we must look at where Indonesians spend their income.

Based on our study, the average Indonesian household spends around 54 percent of their income on food. This is high when compared to other countries in the region. Households in Malaysia, Thailand, and the Philippines spend only around 33 percent to 45 percent of their income on food.

It is imperative for the government not only to create jobs, but also to ensure that food inflation remains low. In this regard, the government is blessed by low commodity prices brought down by the global economic slowdown.

While the government has had success keeping inflation low to maintain purchasing power, its historical track record has been rather poor when it comes to effectively spending any budget or stimulus funding, particularly at the regional level.

In the past three years, data from the Finance Ministry shows much of the spending was not absorbed into the wider economy, with most being spent only towards the end of each year.

The government's budget absorption from 2005 to 2007 increased from 60.1 percent to 89.4 percent. For the sake of the domestic economy, it is paramount that the government take steps to avoid what happened in 2008: Having spent only 50.7 percent of the 2008 budget in the first nine months of the year.

Besides budget absorption issues, the government will face other obstacles in delivering the planned fiscal stimulus.

The first obstacle stems from moral hazard - how to choose without prejudice companies that will benefit from the stimulus. This could create many problems during its implementation.

The second obstacle would come from the local government's participation. Based on the ministry's data, almost 30 percent of total government spending will be transferred to local governments in the 2009 budget.

Any stimulus spending here would depend on how the local governments have completed their 2009 budgets.

Unfortunately, there are 293 local governments or 57 percent of regions in Indonesia, that have yet to complete their budgets as of January 2009.

The delayed budget approvals could postpone the start of the much needed infrastructure projects. We believe that the worst impact from the global financial turmoil will be in the first half of 2009.

Now is a critical point for the government to accelerate spending in the economy to absorb rising unemployment and concurrently maintain purchasing power.

Based on our estimates, government spending growth at 5 percent would support private consumption growth at 4 percent in 2009. We view positively the government's commitment to spend the budget more aggressively, starting in the first quarter of this year.

The plan to spend around 35 percent of the total amount in the first half of 2009 is a good move by the government.

This could result in 50 percent greater spending absorption compared to level in 2008.

A blessing in disguise for Indonesia is the fact that 2009 is an election year.

If the elections are held peacefully, we believe spending by political parties would undoubtedly create an additional stimulus.

This coupled with government spending, disbursed effectively, could indeed provide a successful shield from the current external turmoil.