The national burden of government debt has once again become one of the hot subjects of public debate in the current campaign season and lead up to the July 8 presidential election, with some candidates exploiting the issue in their attacks on incumbent President Susilo Bambang Yudhoyono.
However, these debates will not contribute to increasing public understanding of the issue, or the management of public-sector debt, as long as critics focus on the 26 percent increase in debt levels during the last four years (October 2004-March 2009) to a cumulative total of more than Rp 1,700 trillion (US$170 billion).
In fact, some lines of argument may even mislead the general public, with several campaigners suggesting public-sector finance should normally be running debt-free.
Finance Minister Sri Mulyani Indrawati is right in arguing that the issue should not be seen just from the perspective that government debt has increased, but more importantly about what level of sustainability those debts can achieve.
Despite the significant increase in government debt, she said, the burden has been lessened as overall debt is more sustainable. As a percentage of gross domestic product, government debt fell from 57 percent in 2004 to 33 percent as of last December. This means that in terms of the economy the government is able to fully service its debts in a timely fashion because the size of the debt has increased along with expansion of the economy.
Government borrowing is inevitable within public-sector finance management because debts enhance the economy’s growth potential through targeted investments on infrastructure and human capital. Borrowing is an effective way for the government to use public spending to stimulate the economy, especially when private investments are slackening, such as in the past two years.
As a percentage of total government spending and revenue, debt service payments also decreased steadily from 14.6 percent and 15.50 percent respectively in 2004 to 9 percent and 10 percent in 2008. However debt sustainability would be meaningless if the debt service payments come at the expense of basic public needs. It is not good enough to only use conventional macroeconomic approaches and financial variables to determine debt sustainability.
The question here then is “sustainable for whom”?
It is, for example, financially possible for the government to service its debts entirely but with the majority of people still living in absolute poverty because debt service payments far exceeded expenditure on education, health, poverty alleviation and basic infrastructure.
The next question is whether government debt is sustainable from the public’s perspective.
In this case, debts are also fairly sustainable from the social dimension because budget allocations for basic services such as education and health, social-safety-net and poverty alleviation programs continued to increase substantially.
In fact, for the first time in Indonesia’s history, budget appropriations for education this year reached as high as 20 percent of state spending, as required by the Constitution.
