A Hard Time Quitting the Debt Addiction
Yopie Hidayat (Contributor)
DEBT has the power to lull people into a false sense of security, and it is addictive. It is not just individuals or corporations; a government can fall prey to it as well, just like how the Indonesian government is falling prey to debt recently. The budget assumption for next year shows how the government would be still heavily dependent to debt.
The main culprit is the ballooning budget deficit due to the Covid-19 pandemic. For two straight years, 2020 and 2021, the government took on a massive budget deficit of more than Rp1,000 trillion per year. Next year, the deficit is projected to be lower than this year. However, it is still a very large amount. The government assumes that the 2022 budget deficit will be between Rp808.2 trillion and Rp879.9 trillion. The government still intends to continue its spending spree to restore the economy, notwithstanding the fact that its revenue is much lower than its spending. To heal the economy malady the government wants to continue giving various incentives and distributing social aid.
That is a valid reason. The government has no choice but to go with a budget that runs a very large deficit. But in the financial market, investors will start looking at that policy from a different perspective. The key question here is: how can the government get out of its debt addiction? This is an important issue. Indonesian economic policy’s main anchor, which earns the trust of foreign investors so that they keep buying government bonds, is tight fiscal discipline, i.e. to keep government’s deficit under control.
Before the pandemic erupted, the National Financial System Law strictly limits the ratio of the national budget deficit to the gross domestic product (GDP). This ratio was not allowed to exceed three percent. After the pandemic, the government released a new government ruling for Covid-19 mitigation, which was then formalized into Law No. 2/2020 by the House of Representatives.
This change gave a leeway for the government to abandon its fiscal discipline. The ratio of deficit to GDP was allowed to breach the three percent threshold. However, there is a time limit for the government to enjoy this exception. It will only last until the end of 2022.
So the ratio of budget deficit to GDP must go back to three percent in 2023. If the deficit assumption in 2022 is still as high as Rp879.9 trillion, then its ratio to GDP will reach 4.85 percent. Lowering this ratio, from 4.85 percent to three percent on 2023, will be a huge challenge for the government. To prevent the chasm of deficit from breaching the limit, the government must be able to increase its earnings, especially from taxation. The other option, which can also run in parallel, is self-restraint to reduce spending.
It is not easy for the government to raise its tax earnings. The track record has shown that the ability of the country’s bureaucracy to collect taxes has been declining for so many years. One indicator is the ratio of tax revenue to GDP, which on 2020 was only at 8.3 percent.
The impact of the pandemic cannot become a justification for this extremely low ratio. The decline of this ratio has been going on long before the pandemic struck. It already slipped below 10 percent since 2017. If we use this ratio as a measure, according to World Bank data as of 2019, the ability of Indonesian bureaucracy to collect taxes is even lower than that of war-torn Afghanistan.
The corruption scandal involving tax officers which was just exposed last month increasingly vindicates investor’s doubts on the ability of Indonesia to get out of the abyss of deficit by increasing tax earnings. If its tax officers are still unscrupulous enough to play dirty in time of such a deep crisis, how can the government ask the public to pay even more taxes?
It seems the only way for the government to get out from a debt dependency is to cut its unnecessary spending more aggressively as soon as possible. Next year budget would be a good start. Procrastinating until 2023 deadline to come would simply be too late.