Vid Adrison: Fiscal Stimulus for Economic Recovery
Delli Asterina – Public Relations of FEB UI
Depok – (6/8/2020)
Vid Adrison, Ph.D Chair of the Department of Economics, FEB UI, released his article published in Media Indonesia, entitled “Fiscal Stimulus for Economic Recovery” in the following:
“Fiscal Stimulus for Economic Recovery”
At a meeting with governors at the Bogor Palace (15 July 2020), President Joko Widodo stated that the only hope for the source of economic recovery is government spending. Government spending will increase people’s purchasing power so that the economy will keep on running. However, until now, the government’s budget realization remains low.
Until the end of semester I, not a single provincial government had achieved 50% of budget absorption. As a result, local government funds deposited in the bank reached IDR170 trillion. The president reminded governors to boost budget absorption in the third quarter.
The President’s statement before the governors reminded us of the President’s exasperation during the plenary cabinet session on June 18, 2020, which was circulated in the media ten days later. The president instructed the ministers to accelerate spending at the ministries so that more money could be circulated in the society to move the economy.
The low budget absorption in the first semester is not a new phenomenon in Indonesia. A study conducted by Adrison & Flukeria (2016) shows that, except for 2014, the average absorption of local government budgets in semester 2 was below 50%.
Budget absorption usually increases dramatically in the fourth quarter. The time-consuming procurement process is one of the causes of low budget absorption. As a result, the budget absorption for capital expenditures in the first semester is usually much smaller when compared to routine expenditures. The same pattern is very likely to occur in the central government budget.
Budget Absorption during the pandemic
The COVID 19 pandemic forced the government to make changes. One of these is the budget reallocation program. Regardless of whether government activities remain ‘business as usual’ or not, the possibility of low budget absorption remains significant.
This is due to the many administrative stages that the government has to go through until the budget is finally disbursed. Because it involves funds collected from public taxes, the government must be careful in allocating the budget.
The government should prepare everything carefully so that efforts to sustain the economy by increasing budget absorption will not cause legal implications.
Even if the administrative and legal aspects have been prepared carefully and timely, there remain several factors that can cause budget absorption obstacles, especially for capital expenditures.
First, the spread of the Coronavirus. If the spread remains high, the risk of being exposed to the virus will increase. This means, workers on government projects that require a physical presence and are labor-intensive have a high risk of being exposed to the virus.
This risk can result in delays in project work. Usually, the disbursed budget value depends on the percentage of project completion, while project completion is very dependent on the spread of the Coronavirus. Therefore, areas with high COVID 19 distribution are very likely to experience low budget absorption.
The second factor is the possible increase in costs as a result of adhering to health protocols. Inspection of workers involved in government projects will of course cause additional costs.
To reduce the risk of transmission, the number of workers involved in a location must be less than the number of workers normally used under normal conditions.
As a result of this reduction, the time needed to work on projects becomes longer, and companies cannot operate at efficient levels.
In addition, there are additional costs, such as health checks for workers (e.g. PCR). Because health checks must be performed for each worker, and the frequency depends on the length of time the project is working on, project costs will consequently increase.
The increases in costs apply both to projects that are already in progress and those that are still in the pipeline. For 2020 projects that were already on-going before the pandemic, the increases in costs can be accommodated by making changes in contract values.
For projects that have not yet been tendered, the commitment making official (PPK) can set a self-estimated price (HPS) that takes into account the costs for meeting health protocols. However, changes in the value of the contract or HPS cannot exceed the budget ceiling set by the regional government.
Whether changes to the budget limits succeed in increasing budget absorption depends largely on the perceptions of project operators or prospective tender participants. For projects that are already running, the project operator has several options. First, to continue the project, second, to postpone work on the project, and third, to stop the project with various consequences.
For projects that have not been tendered, prospective tender participants will have a choice. First, to participate in the tender, or not to participate. The possibility that the first option is chosen will have a positive relationship to the magnitude of the change in the budget ceiling. However, on the other hand, the high number of corona cases in an area can increase the risk of being exposed. This will reduce interest in choosing the first option and lead to suboptimal absorption of the budget.
Effectiveness of budget policies
Although a lot has been discussed about the situation that we face today, it is better if we discuss it again to identify the right policies. What Indonesia is currently facing arises from the supply shock and demand shock. The corona virus from China has caused disruption in the production chain (supply shock) because we import a lot of goods from China.
On the other hand, the spread of the corona virus results in people reducing activities that require physical interaction; thereby reducing demand for goods and services (demand shock). A decrease in demand for goods and services will have implications for a decrease in the income of people who work in the sectors that produce these goods and services.
Furthermore, a decrease in workers’ income will have an impact on decreasing demand. If left unchecked, there will be a very large economic contraction.
The appropriate budget policy can reduce the negative impact of this pandemic on the economy. Theoretically, government budget policies can influence the economy through the demand side policy or the supply side policy.
Demand side policies aim to maintain purchasing power, such as direct cash assistance (BLT) for the poor affected by COVID 19. Meanwhile, policies that affect the supply side help reduce costs faced by producers, such as interest rate subsidies and tax breaks. During a pandemic, policies on the demand side are usually more effective in the short term. BLT recipients will use the money they receive to buy daily necessities, and create demand for goods or services.
To respond to this demand, producers must use inputs and labor. As a result, workers in this sector as well as in sectors that provide input will earn income. The income will be used for consumption, increasing demand for other products. Thus, the economy will continue to move. What about the policy on the supply side? In order to understand this, let’s position ourselves as entrepreneurs who are directly affected by a policy.
Typically, the entrepreneur’s goal is to maximize profits. In short, profit is the total revenue minus the total cost. This means that there are two sides that will be considered by entrepreneurs. In terms of costs, government policies to reduce taxes will help entrepreneurs reduce costs; a positive thing for entrepreneurs.
However, on the other hand, if entrepreneurs see that the demand for goods is still very low, they will have an incentive to reduce production. In extreme conditions, employers have even stopped producing due to expectations of a decrease in revenue that exceeds the reduction in costs from tax deductions.
The businessman’s decision will greatly affect the absorption of the budget and the effectiveness of policies for sustaining the national economy. Try to imagine ourselves as entrepreneurs who use imported goods and fall into the category of entrepreneurs who can get import tax exemption (Pph 22). The total tax incentive for PPh 22, which has been budgeted by the government is IDR 14.75 trillion. If demand is still low, even though there is an exemption from import tax, the incentive to keep producing and importing goods will be smaller. If many entrepreneurs think like that, the budget absorption will be very small. This condition might explain why the fiscal stimulus in the form of new business incentives was absorbed by around only 10% in June 2020.
The decline in economic activity that we face today is very different from what happened in 1998 and 2008. The risk of being exposed to the Coronavirus causes people to reduce activities that require physical interaction. The activities and expenditures of society tend to be something fundamental. Non-essential activities such as tourism, entertainment, and sporting events will experience drastic declines. As a result, demand decreases, the money circulating in the economy decreases, leading to a decrease in economic activities.
This condition occurs not only in Indonesia, but also in other countries. This means that efforts to break the chain of the spread of COVID 19 are absolutely necessary for a country so that the economy can rebound.
A very important sector to curb the spread of COVID 19 is the health sector, which received a budget of IDR 87.5 trillion from the total budget of IDR 695 trillion prepared by the government. Increasing budget absorption will be very important for stopping the spread of COVID 19. The faster the spread can be controlled, the better it is for economic recovery efforts.
Since controlling the spread of COVID 19 takes time, other fiscal stimuli are needed to get the economy moving. As previously explained, policies that help maintain purchasing power (demand side) are more effective in making the economy moving when compared to policies that help reduce costs (supply side). However, this does not mean that the policy of reducing costs is not important, so that it is altogether eliminated. Policies for reducing the burden of doing business are still needed because as long as the pandemic exists, entrepreneurs will not be able to operate at efficient levels. It is important to understand that a new supply side policy will only be effective in helping the economy if purchasing power is still there.
One way to maintain the purchasing power of society (especially those with low incomes and those adversely affected by the pandemic) is BLT. The assistance received by society is not only useful for stimulating the economy, but also reduces incentives to conduct activities outside. Thus, controlling the spread of COVID 19 can be more effective because of a decrease in social activity. (hjtp)
Vid Adrison Head of the Department of Economics, Faculty of Economics and Business, University of Indonesia (FEB UI)