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Strengthening fiscal policy to reduce inequality
Our economy — the largest in Southeast Asia — is growing, and our country is recognized as a member of the Group of 20, but its economic growth is not inclusive. Inequality is the cause of economic and social ills.
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Arminah (right), 48, and her husband Qoni, 60, inside their house in a slum located under a highway in Teluk Gong, North Jakarta. Arminah scavenges for a living while Qoni sells coffee and repair light bulbs. (JP/Nea Maryami Ningtyas)
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he government has succeeded in reducing the Gini ratio, which is widely used for measuring inequality, to 0.38 in March 2019 from 0.41 in 2014 and has set an ambitious target of reaching 0.37 in 2024. Zero represents perfect equality.
Our economy — the largest in Southeast Asia — is growing, and our country is recognized as a member of the Group of 20, but its economic growth is not inclusive. Inequality is the cause of economic and social ills.
Inequality is hindering economic growth as a result of lower labor productivity, since inequality deprives lower-income earners of the ability to stay healthy and accumulate physical and human capital. Research shows that inequality also leads to a lost opportunity in driving innovation, which is essential for making high value-added products and services through knowledge-based industries. Eventually inequality will increase sociopolitical tension and instability.
Fiscal policy plays a significant role in distributing income. On the expenditure side, the government has designed many social programs to enhance equality. The programs cover multiple aspects, such as education support (through the programs Indonesia Pintar and Bidik Misi), cash and noncash transfers (Keluarga Harapan and Bantuan Pangan Non Tunai programs), health insurance, subsidies as well as the village fund. The government has allocated about Rp 1.49 quadrillion (US$104 billion) in the last five years to fund those programs.
In that period, social program funding grew by an annual 10,5 percent on average from Rp 247.5 trillion in 2015 to Rp 369 trillion in 2019, and the budget for social programs will increase to Rp 385 trillion in 2020.
However, if we look at the revenue perspective, the challenge to reduce inequality, not least to achieve equality, is quite uphill. Our tax ratio still hovers around 11 percent, the lowest rate among ASEAN-5 countries. Meanwhile, the government still grants various tax incentives that reduce tax revenue.
According to the Tax Expenditure Report, the government granted Rp 95 trillion worth of tax incentives in the 2016-2018 period to stimulate private investment. Tax revenues would further decline if President Joko “Jokowi” Widodo gained political support for his plan to cut the corporate income tax (CIT) from 25 percent now to 20 percent. The Directorate General of Taxation assumes around Rp 87 trillion in tax losses if the CIT rate is reduced, and this will tighten the budget for social programs.
