The issue regarding fiscal sustainability has become increasingly important since the Covid-19 pandemic happened. Several countries have combined policies for handling Covid-19 and extensive economic stimuli to prevent health crises and economic crises.
Some countries such as Australia, Singapore, the United States, and Malaysia have issued fiscal stimuli of more than 10 percent of GDP. On the other hand, Canada, Germany, and Saudi Arabia are between 2 – 4 percent of GDP, and Indonesia has issued a fiscal stimulus of 2.5 percent of GDP.
“The ratio of the APBN deficit to GDP is estimated to surpass the threshold set by the government, which is more than 3 percent over the next three years,” said Nur Widiastuti on Friday (18/12) during an open examination for doctoral promotion at the UGM Faculty of Economics and Business.
Nur Widiastuti said, as quoted from the Ministry of Finance, that a country can attain fiscal sustainability when the APBN can dynamically perform its function as a catalyst and stabilizer for the economy. Besides, it should have been able to fulfill the long-term expenditure needs and obligations. There are two indicators of fiscal sustainability generally used: the ratio of the primary balance to GDP and the debt ratio to GDP.
She also added that in 2019 the ratio of government debt to GDP in many countries had experienced a significant increase from 185 countries, 68 of which had a debt-to-GDP ratio of more than 60 percent. The Indonesian government debt ratio has touched a figure above 60 percent during the period 1998 – 2002 as a result of the 1998 crisis, and subsequent developments over the fourteen years, namely the period 2001 – 2014, the percentage of government debt to GDP shows a downward trend to reach the lowest figure, it was 22.95 percent in 2012.
“However, in 2013 – 2018, the government debt ratio to GDP remained to increase. It was reaching 29.98 percent in 2018. While Indonesia’s primary balance has been in shortfall since 2011, the largest primary shortfall ratio to GDP occurred in 2017. The ratio of the largest budget shortfall to GDP in 2015 was 2.59 percent. These data show how important a study on fiscal sustainability is in Indonesia,” said the lecturer at STIE Widya Wiwaha Yogyakarta.
Three essays consisted of Nur Widiastuti’s dissertation, one essay measuring the threshold of fiscal sustainability. The second essay estimated fiscal sustainability by using the government debt stationarity test and estimating the fiscal reaction function. The third essay evaluates the effect of government spending on increasing productivity (productive spending) consisting of capital expenditures, health spending, and education spending on economic growth in a budget deficit situation.
The fiscal sustainability test with the debt stationarity test and fiscal reaction function show consistent results, none other than fiscal sustainability in Indonesia. Thus, the government had responded well to the increase in debt by increasing the prime surplus.
Nur revealed that the policy implications for controlling fiscal sustainability, including, first, primary balance data in Indonesia since the period 2011 – 2019, showed a deficit, so it is necessary for the government to gradually reduce the primary balance deficit to pay interest repayments without causing new debt. Second, this study also proves no linear or in-the-form-of-a-square relationship between debt and primary balance. This fact represents that initially, the government responded to the increase in debt by increasing its primary surplus. However, at a particular threshold, the ability to respond from the government is soon getting weaker. Therefore, the government should be more concerned and bold the fiscal discipline and reforms through strict rules to maintain a large government debt ratio to GDP. Besides, strict debt management will help the government keep its debt in a lower position.
“Thirdly, productive spending, and government debt ratio also had an impact on economic growth. In addition to the accuracy of managing the amount of debt, it is necessary to manage a proper allocation of government spending, especially spending, to increase productivity,” Nur explained while upholding her dissertation on Fiscal Sustainability in Indonesia virtually.
Author: Agung Nugroho
Translator: Natasa A