As the government has to make a gradual transition to the legal fiscal deficit ceiling of 3 percent of gross domestic product (GDP) in 2023, it proposes a total spending plan of Rp 2.71 quadrillion (US$188 billion) for 2022, slightly less than the Rp 2.75 quadrillion estimated for this year. The spending is based on a fiscal deficit target of Rp 868 trillion or 4.85 percent of GDP, down from this year’s estimate of 5.82 percent.

Qualitatively, though, the composition of the lower spending will essentially be similar to this year. The three sectors that get the largest budget allocations remain the same: education (human resources development) with Rp 541.7 trillion or 20 percent of the total spending, social assistance Rp 427 trillion and health Rp 255.3 trillion to cope with the pandemic. However, budget appropriations for basic infrastructure will be reduced by 8 percent to Rp 384.8 trillion.

The rationale is that government spending can no longer be expected to contribute to the GDP as much as it did in 2020 and 2021. Both household spending and investments will have to contribute to more than 90 percent of GDP growth, which is targeted at 5 to 5.5 percent, against an estimated 3.5 to 4 percent growth this year.

Hopefully, the Indonesia Investment Authority (INA), the sovereign wealth fund, which has reportedly secured tens of billions of dollars in investment commitments from investors in Arab countries, Japan and the United States, will begin to play its role as a conduit for foreign investment financing for priority infrastructure. INA has primarily been designed to be a vehicle through which foreign investors can partner with the government in financing projects, thereby reducing the government’s share of the financing burden.

The 10.50 percent increase in tax revenues next year, though rather small compared to the expected economic growth of 5 percent, will, however, depend on how fast the House of Representatives would complete its deliberations of the massive tax reform bill proposed a few months ago.

The tax reform bill has been designed to broaden the tax base and intensify tax collection by transforming the Taxation Directorate General into a semiautonomous revenue agency with broader authority.

Returning to the legal deficit ceiling from 4.85 percent in 2022 to 3 percent 2023, though, should be welcomed as a commitment to preserving integrity, and prudential fiscal management would be next to impossible under the current taxation system because of the wide variety of generous tax incentives still given to the private sector and the cut in corporate income tax from 22 percent in 2021 to 20 percent in 2022.

Theoretically, the drastic deficit cut could be made by slashing government spending. But premature fiscal consolidation risks may deepen the economic crisis. A premature withdrawal of fiscal support could jeopardize the recovery and increase absolute poverty.

Popular

Kadin urges stability after Constitutional Court ruling

Jokowi says transition to new government to begi

BCA loan disbursement surges 17.1 percent yoy in first quarter