The Role Of Indonesias Fiscal Stimulus In Reviving The Economy During Global Financial Cricis:

Fact Or Fiction?

OUTLINE
Introduction Literature Review: Fiscal Stimulus Debates 2009 Fiscal Stimulus Package Fiscal Stimulus Evaluation Conclusion

The Role Of Indonesias Fiscal Stimulus in Reviving The Economy During GFC: Fact or Fiction

INTRODUCTION
Facing the global financial crisis in 2009, there were a lot of debates among policy makers and academics on the effectiveness of fiscal stimulus in the developed countries Indonesian fiscal stimulus package was signed and implemented without any dispute or disagreement on whether it will be effective or not in reviving the economy. Some claimed that the fiscal stimulus policy played a major role in keeping positive economy growth in Indonesia This study argues that fiscal stimulus package had very limited role in helping the recovery of the Indonesian economy in 2009
The Role Of Indonesias Fiscal Stimulus in Reviving The Economy During GFC: Fact or Fiction

FISCAL STIMULUS DEBATES

3T "Timely, Temporary, and Targeted" (Furman, 2008) Ricardian Equivalence and Crowding Out Effect Feldstein (2009): one of the reasons of fiscal stimulus ineffectiveness is the time lag between the decision to conduct and its realization Factors affecting the effectiveness of fiscal stimulus (Ilzetzki, et.al, 2009):
Developed vs Developing Countries Exchange Rate Flexibility The Level of Openness The Level of Debt

Gravelle (2002) showed that the tax cut policy depends on income levels MPC
The Role Of Indonesias Fiscal Stimulus in Reviving The Economy During GFC: Fact or Fiction

2009 FISCAL STIMULUS PACKAGE

ITEM ALLOCATION Budget Law 2009 IDR 56,300 A. Tax Saving IDR 43,000 1 Personal Income Tax Rate Cut (35% --> 30%) IDR 13,500 2 Increasing the limit level of income that is not accounted in the tax IDR 11,000 (Pendapatan Tidak Kena Pajak or PTKP) 3 Corporate Income Tax Rate Cut (30% --> 28%) IDR 18,000 B. Tax Subsidy/Waivers to Business Sectors IDR 13300 1 Palm Oil VAT IDR 800 2 Plant Oil VAT IDR 200 3 Import Duties Subsidy for input and capital goods IDR 2,500 4 Oil and Gas Explorations VAT IDR 2,500 5 Geothermal Income Tax IDR 800 6 Act 21 Income Tax IDR 6,500 Additional C. Nontax Subsidy, Government Expenditure, and Financing for Business Sectors 1 Reduction of Gasoline Price (Solar) 2 Discounted Peak Load Electricity Tariff for Industry 3 Community Empowerment Program (PNPM) 4 Additional Stimulus - Interest subsidy for clean water company - Generic medicine subsidy - Revitalization and rehabilitation of primary warehouse in the food production centers - Infrastructure projects - Capital Injection for Jamkrindo and Askrindo Total
Source: Indonesian 2009 Fiscal Stimulus Document, Ministry of Finance

IDR 16,959 IDR 16,959 IDR 2,779 IDR 1,377 IDR 601 IDR 12,200 IDR 15 IDR 350 IDR 120 IDR 11,215 IDR 500 IDR 73,259

Goals: 1. to preserve and improve peoples purchasing power to maintain household consumption growth above 4 percent; 2. to preserve firm competitiveness facing the global crisis; 3. to improve the employment absorption and cope with firm layoffs through infrastructure projects.

The Role Of Indonesias Fiscal Stimulus in Reviving The Economy During GFC: Fact or Fiction

FISCAL STIMULUS EVALUATION

Criteria: 1. Timing 2. Target 3. Implementation 4. Multiplier Effect

The Role Of Indonesias Fiscal Stimulus in Reviving The Economy During GFC: Fact or Fiction

TIMING
Fiscal stimulus should be given at the peak of the economic crisis, not after the economy has started its recovery process
Indonesian Quarterly Economic Growth
7.0 6.5 6.0 5.5 5.0 4.5 4.5 4.0 3.5 Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 GDP Growth
Source: Indonesian Central Bureau of Statistics

Infrastructure Fiscal Stimulus Monthly Progress

100 90 94.73 93.61

6.7

6.7

6.7

6.2

6.3

6.3

5.9

80 70 60 47.45 42.1 27.79 13.93 14.72 24.95 62.85 57.45

5.7

5.3

4.9

5.4

50 40 30 20

4.5

4.5

4.1

4.2

10 0

4.51 0.00 4.83 0.06 Jun-09 Jul-09 Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

GDP less Oil and Gas

Physical Progress

Budget Absorption

Source: National Development Planning Agency, 2010

The Role Of Indonesias Fiscal Stimulus in Reviving The Economy During GFC: Fact or Fiction

TARGET
To be effective, fiscal stimulus has to be well targeted Fiscal stimulus should directly target and help the most vulnerable sectors or groups Source: Industrial Statistics, Bureau of Central Statisitcs, 2007, Modified
Economic Sectors Population Groups The most vulnerable population groups were the households with low income Households with low income have higher marginal propensity to consume (MPC) Unemployment
100.00

Quadrant II

90.00 80.00 70.00 60.00

Quadrant I

Exported Output 0.00 20.00

50.00 40.00 40.00 30.00

60.00

80.00

100.00

Quadrant III
20.00 10.00 0.00 Imported Input

Quadrant IV

The Role Of Indonesias Fiscal Stimulus in Reviving The Economy During GFC: Fact or Fiction

Contd
Personal Income Tax Cut Biggest allocation to help house HH in dealing with the crisis HH is expected to increase its consumption. However its not happening
People Response to Personal Income Tax Cut

WHY? People who eligible for tax in Indonesia are the people who has income more than IDR 15.4 million a year or in average IDR 1.3 million per month. Most of the people who pay tax work in formal sector Individu need to have tax payer identity number, for the tax authorities to be able to tax The policy is enjoyed not by the low income HH

11.54 11.54 15.38 3.85 57.69

Investment

Saving

Pay Debt

Consumption

Do Nothing

Source: National Development Planning Agency/Bappenas, 2010

The Role Of Indonesias Fiscal Stimulus in Reviving The Economy During GFC: Fact or Fiction

Contd
Import duties subsidy (in form of government paid import duties policy BM-DTP) was one of the policies used by the government to help the industry
Stated in the fiscal stimulus documents, sectors received the subsidy are heavy equipment, components for small size steam power plant, skim milk and full cream, components of motor vehicle, electronic components, components of ships construction, and aeroplane Based on the scatter plot, the ideal sectors to receive tariff duties subsidy should be sectors with high percentage of imported goods, sectors in the first and second quadrant Among sectors given the subsidy, components of motor vehicle, components of ships construction, and aeroplane are not fit into that category

Some of the policy goals were for other purpose not directly related to the global financial crisis. For example: VAT subsidy for oil and gas exploration. The goal for this policy was to improve the production of oil and gas in the future. That goal has nothing to do with helping the industry coping with the global financial crisis.

The Role Of Indonesias Fiscal Stimulus in Reviving The Economy During GFC: Fact or Fiction

Contd
UNEMPLOYMENT MISSMATCH Most of the layoffs were in:
Textile, garment, beverage, furniture, manufacture, plastics, trans port, wood, and mining (source: Directorate of Labor, NDPA)

The main instrument used by the government was the infrastructure projects. Most of the projects were in:
Construction sectors, such as building road, bridge, or traditional market.

The Role Of Indonesias Fiscal Stimulus in Reviving The Economy During GFC: Fact or Fiction

IMPLEMENTATION
At least two of the fiscal stimulus instrument are actually not a stimulus: tax cut and national program of community empowerment Tax subsidy on act 21 income tax: In this policy, corporates can claim their employee income tax to the government. However, since the corporates afraid that the employee will ask the same incentives in the next year when this policy has stopped, most corporate decided not to use this incentives. The import duties subsidy: At the end of 2009, the realization of this policy is only 0.29 per cent. The low realization rate was caused by relatively late implementation of this policy.
Fiscal Stimulus Realization Rate
Policy Tax Cut a. Personal Income b. Corporate Income c. VAT d. Import Duties Government Spending a. Subsidies b. Government Transfer to Corporate c. Infrastructure Projects Total
Source: Ministry of Finance, Modified

% to Budget 81.44 79.70 100.00 52.43 0.29 91.81 91.93 100.00 91.43 83.84

Firm or corporate usually signs contract to buy input goods in the beginning of the year, meanwhile the policy effectively implemented in the second semester of 2009. This policy was not effective also due to the lower demand of imported goods, as a response of lower demand and increasing price of imported goods due to the global financial crisis

The Role Of Indonesias Fiscal Stimulus in Reviving The Economy During GFC: Fact or Fiction

Contd
Infrastructure projects:
The budgeting process, caused by lack of supporting regulation, complicated administration, and accounting process; Problems in process of tender; Problems in the implementation. To be more specific here are problems occured in the implementation of infrastructure projcets:
Transportation infrastructure: unabsorbed budget caused by problems in budgetting, i.e: in the construction of konawe harbour. Some of the projects cancelled due to natural disaster, earthquake, i.e: Carocok Padang Harbour. Housing infrastructure: in some case, there was Contract Change Order (CCO) due to a certain technical condition. It cause delay in the construction some the housing, i.e: in Kabupaten and Kota Bandung. Meanwhile, housings build for fisherman in Biaknumfor were cancelled due to land problem. Labor infrastructure: there was overlapping activities between ministry of labor and BNP2TKI. Traditional market infrastructure: projects were cancelled in Jasinga, Bogor, West Java and Siborong-borong, North Tapanuli. The same case was happened in Penajam, East Kalimantan due to land availability.

The Role Of Indonesias Fiscal Stimulus in Reviving The Economy During GFC: Fact or Fiction

MULTIPLIER EFFECT
Method: SVAR Data: Net Taxes and Government Spending Quarterly Seasonally Adjusted (disaggregated using past quarterly past pattern source: Ministry of Finance, NDPA, and Coordinating Ministry for Economic Affairs) Result:
Tax Shock Spending Shock Impulse Response of Output Impact Fiscal Multiplier -0.39 -0.12

*Both shocks are statistically insignificant

Response of GDP to shock in GDP

Response of GDP to shock in Spending

Response of GDP to shock in Net Taxes

The Role Of Indonesias Fiscal Stimulus in Reviving The Economy During GFC: Fact or Fiction

CONCLUSION
Based on the result of all evalution criteria, we find problems in Indonesian Fiscal Simulus, starts from its:
Timing: there was a significant lag between the moment the document signed and the implementation of fiscal stimulus Target: some of the fiscal stimulus used are not well targeted to the most vulnerable economic sectors or population groups Implementation: there were problems in design and technical matters Multiplier effects: there is no significant impact on GDP to shock in tax and government spending

Those problems shows no support to the claim that fiscal stimulus play a major role in reviving indonesian economy during the global financial crisis.
The Role Of Indonesias Fiscal Stimulus in Reviving The Economy During GFC: Fact or Fiction

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