Ari Kuncoro: The Direction of the 2021 State Budget
Nino Eka Putra ~ PR of FEB UI
DEPOK – Tuesday (18/8/2020), Professor Ari Kuncoro, Rector of the University of Indonesia, released his article published by Kompas Daily, an Economic Analysis rubric, entitled “Direction of the 2021 State Budget”. The following is the writing.
“The Direction of the 2021 State Budget”
The President’s speech for the introduction of the 2021 Financial Note reflects the conditions experienced by Indonesia during the Covid-19 pandemic, namely the demand and supply sides in an unconnected or decoupling economy. Economic growth which contracted by 5.32 percent in the second quarter of 2020 was deeper than expected, but market players had already anticipated it. This can be seen from the Composite Stock Price Index and the rupiah exchange rate which remained fluctuating in a reasonable manner.
The interaction between people’s purchasing power and the national production side that is sluggish is reflected in the structure of a contractionary gross domestic product (GDP), both from the sectoral and expenditure sides. The transportation and warehousing sector were the largest contributors to the contraction with an annual growth of negative 30.84 percent, followed by the accommodation and food and beverage sector which was at a minus 22.02 percent. Fortunately, the situation did not get worse because several other sectors were still showing positive growth, such as agriculture (2.19 percent), education services (1.21 percent), real estate (2.3 percent), health services (3.71 percent), and water supply (4.56 percent).
The highest growth was recorded in the information and communication sector with 10.88 percent, reflecting that efforts to connect the aggregate supply and demand began to be carried out in alternative ways using information technology. However, it is a realization that this method is still not sufficient to accommodate all transactions in the economy.
From the expenditure side, the main source of negative growth was contributed by private consumption. With a share of about 59 percent of GDP, the annual growth of minus 5.51 percent directly impacts on GDP growth. The component of public consumption whose growth was the worst reflected the stay-at-home economy, namely a negative growth of minus 16.53 percent for expenses for accommodation, and food and beverage. Fortunately, there is still positive compensation from spending on housing and household equipment as well as health and education, respectively at 2.36 percent and 2.02 percent. Gross fixed capital formation (PMTB) or investment contracted negatively by 8.61 percent. After the 1998 crisis, PMTB always grew in correlation with consumption demand.
Government consumption, which was originally expected to provide compensation, actually grew negatively by 8.61 percent. This happened because of the delay in the realization of government budget expenditures. As of May, the budget realization for ministries and institutions was 10.41 percent. This is because the bureaucracy of budgeting requires adjustments from the assumption of a normal situation to coping with a pandemic. In the introductory speech to the 2021 Financial Note, the government is determined to boost spending in the third and fourth quarters.
Mitigation of uncertainty
The government as a system integrator is endeavoring to reverse the situation. The increase in the indicative ceiling for APBN (State Budget) spending at several ministries and institutions shows that the government is trying to reconnect the supply side or production capacity of the economy with the demand side of the public while simultaneously injecting new purchasing power into the circular flow of national income.
The Ministry of Public Works and Public Housing (PUPR) received an allocation of Rp 149.8 trillion. The PUPR Ministry will try to increase community mobility by improving infrastructure for physical interaction and increasing food security through repair and construction of irrigation. As a complement, the Ministry of Transportation received IDR 45.7 trillion to strengthen mobility of people and logistics.
The allocation for the Social Ministry is IDR 92.8 trillion. However, there is compensation in the form of productive social assistance for small and micro business households of IDR 2.4 million per business unit to maintain supply chains in the small and medium enterprises (SME) sector. Meanwhile, workers / employees in the formal sector will receive a transfer payment of IDR 600,000 per month for a certain period.
The wide range between the lower bound (4.5 percent) and the upper limit (5.5 percent) of the 2021 economic growth projection indicates a high degree of uncertainty. This range really depends on the leverage of government spending. The government can spend money, but how big will the impact be on the economy really depends on the size of the marginal propensity to consume (MPC) of the public. If the income from government social assistance is only saved, while the middle class saves money above normal needs for emergencies, the MPC will be smaller. This means that the leverage level of government spending, including government investment and private investment, will also have a smaller impact on economic growth.
Contrary to the proverb of to be rich, one must be frugal, in the current situation being too frugal becomes the cause of a recession. Excessive worry about the pandemic will reduce the leverage of government spending so that social assistance can become redundant and not invigorate the economy. The reduction in the level of concern is a spiral (self-perpetuating) process that is highly dependent on the compliance of the public in implementing healthy and clean behavior, maintaining distance, avoiding crowds, wearing masks, and washing their hands frequently. The higher the compliance and the lower the addition of new positive cases, the more confident the public will be to carry out activities. Facts show, mass vaccination to prevent Covid-19 is still far ahead. Thus, steps that can be taken temporarily are to discipline oneself to behave in a healthy and clean manner.
The government has also allocated a budget of IDR 14.4 trillion to expand tourism in order to accelerate economic recovery. In this way, the government wants to stimulate the flow of purchasing power, especially from the middle class, which has been locked in the cities, by increasing mobility while adhering to health protocols.
There is an illustration of business practice in the United States. The city of the Hamptons, Long Island, in New York State, has hotels with customized tour packages according to wellness protocols for individuals, direct families or extended families who want a new refreshing atmosphere. Parents can continue to work so that the abbreviation work from home (WFH) changes to working from hotel, while their children are doing SFH (schooling from hotel) activities. This package can be offered for other categories not limited to premium class accommodation. Creativity is what is needed to balance the health protocol and restore the economy. (hjtp)
Source: Kompas Daily. Edition: Tuesday, 18 August 2020. Economic Analysis Rubric. Page 1 continued to Page 15.