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COVID-19 resurgence poses risk to economy
Fiscal space needed to allocate budget funds to achieve 3% deficit target by 2023
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ringing the budget deficit back down to below 3 percent of the gross domestic product (GDP) may prove challenging for the government as efforts to contain the coronavirus could leave an ugly mark on the state balance sheet.
A surge in COVID-19 cases would lead to more people getting infected and filling up hospitals across Indonesia and may compel the government to tighten mobility restrictions.
Additional curbs would hurt business sales and could cause job losses, forcing the government to disburse more stimulus funds to buoy economic activity.
Increasing state expenditure, combined with plummeting tax income as the economy slows down, would swell the budget deficit. Keeping the deficit higher than planned for a prolonged time would see the state accumulate more debt.
The government has intensified efforts to test people for COVID-19 after millions of Indonesians decided to travel to their hometowns for traditional Idul Fitri get-togethers despite a travel ban.
Indonesia has detected local infections of the variant B.1.617, which is known to have exacerbated the situation in India. At the same time, high case numbers in India have prompted authorities there to focus on domestic needs for vaccines and impose an embargo on exports of vaccines to countries including Indonesia.
Finance Ministry Budget Director General Isa Rachmatarwata said the government was doing its best to keep case numbers low, adding that it was important to create the fiscal space for the government to allocate budget funds in order to achieve the 3 percent deficit target by 2023.
“Should COVID-19 cases rise again, it would be more challenging for us to control state spending,” Isa told reporters at a press conference on Tuesday.
According to Finance Ministry data, the government aims to bring the state budget deficit down to below 4.85 percent of GDP next year and below 2.97 percent in 2023. The target stated for this year is 5.7 percent, down from last year’s 6.1 percent.
Deputy Finance Minister Suahasil Nazara said the government was discussing the 2022 deficit target with lawmakers but would still strive to meet the 3 percent budget deficit cap by 2023, as mandated by the 2020 Pandemic Response Law.
“The year 2022 will determine how likely we are to achieve a deficit below 3 percent,” Suahasil told reporters in a press conference on Tuesday.
Center of Reform on Economics (CORE) research director Piter Abdullah said the COVID-19 risk still loomed large over Indonesia’s economy.
He noted that no one could guarantee that the pandemic would end soon, which was why it was best for the government to prepare for any scenario, including a need for increased spending.
“The government should not normalize the deficit in such a hurry,” Piter told The Jakarta Post on Tuesday.
“Should the pandemic still be present in 2022, we cannot simply say, ‘Sorry we cannot help you, because the deficit must be reduced to under 3 percent’,” Piter said, referring to social aid.
The same was true for economic stimulus, he added, especially should the economy not have picked up by the end of 2022. Piter said the government should be ready to maintain a higher deficit to provide more support so that the economy could recover as quickly as possible. If the deficit was brought down too early, the economy could experience a shock.
He suggested the deficit would eventually come back down to below 3 percent of GDP once the economy recovered.
In a report issued on May 19, analysts at Bahana Securities said the government might have the option to extend fiscal waivers for several years, but such a move also posed a risk, as it would not be welcomed by rating agencies, especially while many countries were trying to reduce rather than increase deficit spending.
Bahana estimated that, to achieve the 3 percent deficit target, the government would need to push down annual deficit spending from last year’s Rp956 trillion (US$66.93 billion) to Rp543 trillion by 2023, creating a gap of almost Rp 413 trillion in the state budget that should be addressed as soon as possible.
Based on the same estimate, the government would need to begin this year to increase annual tax revenue by Rp353 trillion and slash spending by nearly Rp60.5 trillion to rebalance the budget within the three-year timeframe.
Bahana said raising taxes was a viable option to increase revenue and estimated that lifting value added tax (VAT) from 10 percent to 11 percent or 12 percent could rake in additional state revenue of between Rp 60 trillion and Rp80 trillion.
Income could be boosted further through a planned revision of the general taxation rules (RUU KUP), including lifting the high-net-worth individual tax rate and personal income tax and combatting tax evasion.
Indef researcher Abdul Manap Pulungan, meanwhile, said raising taxes just to meet the deficit target could take a toll on economic growth as it would cause a price spike and weigh on consumers.
He noted that Indonesia's economy still relied on household spending, which accounts for more than half of the nation’s GDP. Placing a burden on consumers by raising taxes could slow down consumption and hence economic growth.
Instead of raising taxes, especially those affecting consumers, he suggested the government cut pandemic response spending and social aid, arguing that there was plenty of room for greater efficiency in the state budget that would allow the government to control state spending.
“If we do not tighten the budget in 2022, the deficit will swell again,” Manap told Post on Thursday.
