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Jakarta Post

Unrealistic growth target

  • Editorial Board

    The Jakarta Post

Jakarta   /   Thu, June 18, 2020   /   08:17 am
Unrealistic growth target Finance Minister Sri Mulyani Indrawati delivers remarks after the signing of a memorandum of understanding and cooperation agreement at the Office of the Coordinating Economic Minister in Jakarta on Feb. 13. (Antara/M Risyal Hidayat)

So long as no vaccine or treatment for COVID-19 is widely available, human interaction will remain dangerous due to risk of infection, thus preventing businesses from returning to normal. Even billionaire philanthropist Bill Gates has predicted that a vaccine for the virus may emerge only later this year at the soonest, or even in mid-2021.

Policymakers will continue to walk on a tight rope with physical distancing, testing, tracking, tracing and isolating as their main instruments to fight the spread of the virus.

Hence, we find it difficult to understand why the government is so optimistic as to assume economic growth of 4.5 to 5.5 percent as part of the major macroeconomic framework for preparing its budget proposal for 2021.  

No wonder most of the major factions at the House of Representatives, which received the broad outlines of the draft budget framework in a plenary session on Monday, rejected the growth target, calling it unrealistic. We also see the growth estimate as overly optimistic.

Most international analysts have foreseen a global economic contraction of 3 to 5 percent this year and Indonesia’s economic growth from a contraction of 2 percent to zero. Our economy expanded by almost 3 percent in the first quarter but that was because the country remained unaware of the virus and discovered the first COVID-19 cases only in early March.

Read also: GDP to contract by 3.1% in Q2 on COVID-19 headwinds

The abrupt halt to most commercial activities in the country since the middle of March has imposed economic pains so profound and enduring that recovery could take one to two years, depending on the availability of a vaccine.

The losses to companies, many already saturated with debt risk, the collapse of purchasing power, with unemployment exceeding 10 million, could eventually trigger a financial crisis of cataclysmic proportions.

Businesses, especially those that require direct contracts with customers, such as tourism and travel, and other service sectors such as trading, restaurants and barbershops, will continue to operate far below capacity not only because they have to comply with physical distancing guidelines but also because many consumers continue to avoid big gatherings and have decreased other social activities.

Judging from the function of the state budget as a communication system, conveying signals about government behavior, prices, priorities and commitments, the state budget should not purvey a sense of pessimism or doomsday scenario. But an unrealistic macroeconomic indicator such as the growth estimate could mislead businesspeople. They may even be apprehensive of upcoming painful surprises next year as the government would certainly have to amend the budget to cope with the harsh reality. 

Businesses would be afraid that the government may set a high tax revenue target as well and squeeze taxpayers to achieve the targets. Setting tax revenue targets on the basis of an estimated 4.5-5.5 percent economic growth, compared to zero or even negative growth this year is indeed unrealistic because the government has cut the corporate income tax rate from 25 percent to 22 percent, while the tax base has by and large remained stagnant.