• Umar Juoro, The Jakarta Post
Jakarta | Fri, September 16 2016 | 08:36 am
President Joko “Jokowi” Widodo’s administration commenced with high expectations for fiscal policy and economic growth. Capital expenditures, especially for infrastructure development, increased significantly. To provide broader fiscal space, fuel subsidies were practically eliminated, which came easily on account of the low oil prices.

In order to support the expenditure, the target for tax revenue increased by 30 percent. This became an issue for low tax compliance because it could not be overcome in the short run. The gap for tax revenue is too large. To make a short cut, a tax amnesty was launched in July with a potentially overly ambitious revenue target of Rp 165 trillion (US$12.54 billion).

Finance Minister Sri Mulyani Indrawati said a budget cut was necessary, as the budget deficit could reach Rp 219 trillion. The budget cut was initially Rp 133 trillion, consisting of Rp 64 trillion for ministries and national government agencies and Rp 72 trillion for regional administration grants.

The government claimed the cut would not impact infrastructure spending. However, given the uncertainty of revenue from the tax amnesty, there is no certainty that there will not be further budget cuts in infrastructure spending.

Two months after the tax amnesty was introduced, the revenue is still only reaches approximately 4 percent of the target. Bank Indonesia (BI) estimates that only Rp 18 trillion in additional revenues will be collected in 2016.

The tight budget policy will be a reoccurring issue in 2017 and 2018, as tax revenue is not expected to grow quickly, while health care, other social spending and infrastructure development should increase.

The approach of former finance minister Bambang Brodjonegoro differed from Sri Mulyani’s approach. Bambang believed that by increasing tax revenue, even at the risk of slowing down the economy, the government would be able to expand its role of spending, especially in infrastructure.

Sri Mulyani prefers tax incentives to encourage spending in order to generate economic growth. Increasing tax revenue could be a dangerous strategy during an economy lull. She executed this approach in 2008, during the global financial crisis, to protect the Indonesian economy from being negatively impacted by the crisis. Some politicians suggest lifting the cap for a deficit higher than 3 percent of gross domestic product, but this could be difficult to control and could negatively affect fiscal credibility.

A remaining issue is how fiscal policy will be accepted by the President and politicians who desire a larger role for the state budget, state-owned enterprises and government spending with the goal of supporting economic growth. So far, the President seems to support the budget adjustment as a reasonable measure. However, technical ministries and local governments seem to be unsatisfied with the budget cut. Although the budget directive claims that the budget cut focuses on non-essential spending, the competing interests of particular political groups have to be sacrificed. Most local governments use the general allocation fund (DAU) to pay salaries, so a budget cut has serious implications for local politics. Governors and district heads have complained formally to the finance minister.

As long as the finance minister receives political support from the President, a promising fiscal policy can be implemented. However, if the President sides with politicians, the finance minister could face political difficulty. This happened in 2010 when Sri Mulyani, the finance minister at the time, came under pressure because of the interest of powerful politician Aburizal Bakrie, and again when former finance minister Agus Martowardojo faced pressure from technical ministries for a bigger budget under the Susilo Bambang Yudhoyono administration and for the Sunda Strait bridge project in 2013.

Another issue is the decision to cut corporate tax by 17 percent, which has been mentioned by President Jokowi on several occasions. The finance minister’s position is not yet clear regarding this issue. There’s also the plan to transform the Directorate General of Taxation into an independent internal revenue service. These issues could impact tax revenue significantly.

President Jokowi should be realistic and committed to supporting the finance minister in implementing a prudent fiscal policy. Otherwise, economic policies could lose credibility and economic growth could be negatively impacted. The political impact of not entertaining political and lobby interests is manageable compared to loosening fiscal discipline. However, experience shows that we should not undermine the influence of powerful lobby interests.

The writer is senior fellow at Center for Information and Development Studies and the Habibie Center.

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