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Why Indonesia needs independent fiscal council
For the Indonesian government, maintaining fiscal credibility becomes more important as Indonesia plays a more significant role in the global economy. The country is now the biggest economy in Southeast Asia and a member of the G20.
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Illustration of economic growth (Shutterstock/Number1411)
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iscal credibility is one of the most important fundamentals of macroeconomic policy. For the Indonesian government, maintaining fiscal credibility becomes more important as Indonesia plays a more significant role in the global economy. The country is now the biggest economy in Southeast Asia and a member of the G20.
According to a PricewaterhouseCoopers Report, Indonesia’s economy is projected to be the fifth-largest in the world by 2030, with gross domestic product (GDP) at about US$5.4 trillion.
The bright future doesn’t come without challenges. Under President Joko “Jokowi” Widodo’s administration, the government is committed to implementing an expansive fiscal policy. For example, the government wants to be more focused and spend more money on infrastructure.
The government, then, needs to borrow money from other countries or international organizations. To make sure that it produces prudent fiscal policies, the country has a legal commitment to maintain the fiscal deficit below 3 percent of national income and the debt ratio could not exceed 60 percent of GDP. These rules are even written specifically in Law No. 17/2003 on state finances.
Having a legal framework regarding fiscal rules is a good way to maintain fiscal credibility. However, since public debt has long been a sensitive issue, there are always endless debates about any increase in debts. The main problem is that public debt is often used as political rhetoric. Recently, the increasing level of government debt has become a hot topic ahead of the 2019 presidential election. The rival presidential candidate, Prabowo Subianto, claimed this rising debt would likely bankrupt Indonesia by 2030.
Making people believe that the government has always been trying to produce prudent fiscal policies seems more important. It seems the government still has work to do regarding this issue. Compared to other countries, Indonesia’s debt-to-GDP ratio is still manageable. The country’s ratio of debt-to-GDP increased from 24.7 percent to 30 percent between 2014 and 2018. This level is, however, still lower than the 60 percent limit imposed by the country’s laws.
The debt-to-GDP ratios of the United States and Japan, for instance, are 105 percent and 253 percent, respectively. Within the Southeast Asian region, Indonesia’s debt-to-GDP ratio is comparatively low as well. Having these facts, public debt management in Indonesia is relatively well managed. Again, the problem is that the government seems to have a serious challenge in communicating good fiscal policies. Fake news and politicization of economic issues are two other challenges that affect the government’s credibility in maintaining the fiscal policy.
