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Why Indonesia needs independent fiscal council
Fiscal credibility is one of the most important fundamentals of macroeconomic policy
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span>Fiscal 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.
Considering the establishment of an independent fiscal council can be one solution to address a fiscal credibility issue that affects public trust in the government budget. According to the International Monetary Fund, fiscal councils are independent public institutions aimed at promoting sustainable public finances through various functions, including public assessments of fiscal plans and performance and the evaluation or provision of macroeconomic and budgetary forecasts.
As Indonesia does not have a fiscal council now, it can be a good option for the Indonesian government to follow the trend as fiscal councils have been and are being introduced in more countries. Nowadays, 31 countries have fiscal councils. An independent fiscal council can provide the significant support needed by the Indonesian government to maintain its fiscal discipline and improve fiscal transparency.
The future fiscal council can also help the government in building public trust and countering politicization of economic issues as it provides independent testimony or endorsement regarding the government’s effort in providing sound fiscal policies.
There are several possible challenges faced by the government if it decides to establish a fiscal council, ranging from human resources and legal frameworks to the issue of maintaining its independence.
The government needs to consider who will be sitting on the fiscal council. One main question needs to be answered: “Does the council need representatives from the government, the private sector, or academia?”
From the government and central bank’s side, the minister of finance and the governor of Bank Indonesia can assign employees to work in this new fiscal council. The Finance Ministry has about 80,000 employees, so the policy to assign a few of them to work on the fiscal council should not affect the performance of the ministry as an institution very much.
The government has some alternatives regarding the legal framework for the establishment of the fiscal council. It can learn from other countries’ experiences.
According to the database of the Organization for Economic Cooperation and Development, in Finland, for instance, although the fiscal council function is provided for in primary legislation, the National Audit Office of Finland, which it sits within, is provided for in constitutional legislation.
In Hungary, the fiscal council is provided for in constitutional legislation and also in several categories of primary legislation. In Indonesia, the process of amending the Constitution can take a very long time and require an incredible number of hours of political lobbying. Primary legislation or government decrees can be options for the government.
As a future and new institution in Indonesia, the fiscal council would not be free from political interference. Maintaining the independence of a strategic institution would not be easy. One way to do it is to encourage NGOs, academia, or communities to work together to ensure that the fiscal council can do its job with minimum pressure from politicians.
The new fiscal council should also be able to establish formal communication channels with other related institutions.
Building strong coordination with its stakeholders should be on the list of priorities, specifically because the council would also have an extra task to build a good reputation.
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The writer is a Master’s student at the Sanford School of Public Policy, Duke University, who works at the Communications and Information Services Bureau of the Finance Ministry. The views expressed are her own.
