Jakarta, IO – Debates about the State Budget (APBN) always arise at the time national leadership changes. In 2014, discussions regarding cuts in fuel subsidies and infrastructure budgets emerged when President Jokowi began his first term as President. However, in the last decade, regardless of the many ups and downs, Indonesia has admirably survived 2014-2024, despite various challenges.
The APBN deficit was kept in check, and the state revenue has increased from IDR 1,550tn in 2014 to IDR 2,774tn in 2023. The surge in state spending, to IDR 3,100tn compared to 2014 at just IDR 1,770tn. In the last ten years, the APBN policy has proven to exert positive impacts on infrastructure development and the improvement of the supply side in Indonesia.
Even at a conceptual level, debates about budget allocation, whether to have the routine budget, social assistance or infrastructure budget higher, have always become a hot topic. During the leadership transition in 2024, issues related to the APBN also re-emerged. Currently, the main discussion is about funding various programs that the next administration wishes to implement, particularly the Free Lunch program.
At the macro level, we can divide the function of fiscal policy into three aspects: allocation, distribution and stabilization, in accordance with Law 17/2003. The allocation function means that the APBN should play a role in reducing unemployment and allocating the budget efficiently; the distribution function means that the APBN must consider justice and propriety; the stabilization function means that the APBN must be able to maintain the fundamentals of the national economy.
In determining budget allocations, we need to consider which matters the state must pay attention to. In terms of the stabilization function, we can see that the function of the APBN as stabilization has run effectively, particularly from an investor’s perspective, where Indonesia’s ratings have increased to BBB by S&P, BBB by Fitch and Baa2 by Moody’s. Measures such as the debt ratio to GDP, debt service ratio and other stability measures show that Indonesia’s fundamentals are in an appropriate state. Regarding the allocation function, the APBN has carried out its role excellently, with infrastructure development, which has increased the competitiveness of the national economy.
With these achievements, the urgency of the government’s role has slowly shifted from allocation and stabilization functions to distribution. Several factors make improving the distribution function of the APBN important, namely:
Indonesia’s central bank, Bank Indonesia, data shows that inequality in deposit ownership in banks continues to occur, with the percentage of funds owned by households declining to 51% (below a long-term average of 60%), and is also reinforced by the Deposit Insurance Agency (LPS) data about the decreasing percentage of ownership of accounts with balances below IDR 100 million. Meanwhile, the dominance of fund ownership by non-financial private corporations increased sharply to 33% (above the long-term average of 23%). Currently, a large amount of money is owned by the private sector amidst people’s limited purchasing power, which is truly ironic.
The weakening of purchasing power, which is currently emerging with a new popular phrase, “salary deficit”, occurs quite massively and coincides with the declining speed of money circulation at the macro level and the weakening of data on national consumption.
On the other hand, there is an urgency to improve Indonesia’s primary economic sectors, such as agriculture and livestock, amid the increasing tendency of protectionism in many parts of the world, which can trigger inflation of basic necessities and the rising need to balance the role of the rural and urban economies.
The above phenomena spur the urgency to boost the distribution function of the APBN increasingly important, because current national economic problems slowly start to shift from the urgency to increase productivity to the urgency to increase economic turnover and increase nominal GDP, even though Indonesia’s real economic growth is still at 5%.
Regarding concerns about increasing state debt, the latest paper in 2023 by Prof. Atif Mian (Princeton), Amir Sufi (Chicago) and Ludwig Straub (Harvard), titled “A Goldilocks Theory of Fiscal Deficits”, stated that in some situations, the Free Lunch policy could be realized, and the increase in the country’s debt ratio could happen in low or high deficit fiscal condition. The main condition for the success of a wide deficit fiscal strategy is the high sensitivity of nominal GDP to the level of fiscal spending. Government spending must generate a significant economic multiplier.
In a low fiscal deficit with low nominal GDP growth scenario, the debt ratio will rise. On the other hand, even though the fiscal deficit increases, it can be offset by high nominal GDP growth, so the impact of widening the fiscal deficit will be positive. This is because an increasing deficit will pump the demand side of the economy and cause the value of state debt to fall, along with inflation. The indirect impact of a rapid increase in nominal GDP growth can neutralize the effect of an increase in the fiscal deficit.
In the Indonesian context, in recent years, the ongoing debate has been about the constantly declining nominal GDP growth, which in the fourth quarter of last year was recorded at 3.67% from year to year. This low nominal GDP growth shows the importance of a major boost in the economy. If nominal GDP growth remains at a low level like this, without an increase in the fiscal deficit, the state debt ratio will continue to increase, and the debt service ratio will remain at risk, due to the prospect of tax revenues not growing. If we cannot encourage nominal GDP growth, then the current conditions will lead to income growth problems for both companies and individuals, with related tax revenues, of course becoming a further problem. Even with a small fiscal deficit, our debt ratio will increase, due to a slowdown in nominal GDP.
On the other hand, the popular opinion about Indonesia’s low national savings in terms of the savings-investment gap is actually no longer relevant, because Indonesia’s gross domestic savings data is currently at an increasingly higher percentage. World Bank data conveys that Indonesia’s national savings rate in 2022 will be at 39.2%, much higher than in 2014, which was at 33.4%. Interestingly, the level of gross domestic savings in Indonesia’s GDP is much higher than that of Japan and Malaysia, which are at 22.83% and 30.74%, respectively. Slowly but surely, the demographic bonus opens up a vast space to boost the economy faster.
On the other hand, if the portion of third-party funds owned by households is lower and without any changes in the economic structure, we will see a condition called “indebted demand”, where economic growth will occur simultaneously with an increase in household debt. This is certainly something we want to avoid. Therefore, improving the distribution function of the APBN should become a priority. Studies show that if we stimulate the economy by increasing household debt, it tends to become a time bomb.
Free Lunch as an Instrument of Fiscal Distribution
In terms of the Free Lunch program, if implemented well, it can become an effective fiscal distribution instrument and suit the needs of the country that is trying to improve its human resources quality. In 76 countries, free lunch programs have succeeded in improving people’s living standards and human capital and providing a positive economic impact.
Regarding the issue of increasing the role of fiscal distribution, the inequality in liquid asset ownership that occurs, as explained above, can be neutralized through a free lunch policy. This policy will create real space for increasing public spending amidst the phenomenon of salary deficits and declining purchasing power.
In its implementation, appropriate policy designs for each region are necessary to optimize economic impacts and budget efficiency according to the profile of each area. In regions with good supply chains and infrastructure, implementation can be done through food stamps by involving local MSMEs, which will provide optimal and efficient welfare and macroeconomic impacts. In places where the quality of infrastructure and supply chains do not meet standards, establishing a central kitchen will have maximum impact. Proper planning on program execution must be a crucial concern.
The next discourse about the Free Lunch program revolves around the impact on the APBN. Will the APBN be negatively affected because of growing spending on free lunches? The opinion regarding this negative impact will be valid if the expenditure does not provide an economic multiplier and does not involve other economic actors in the context of the Keynesian multiplier.
In its implementation, if the Free Lunch policy involves many players in the economy, including private MSMEs and new employment, it can be an opportunity to increase the tax base by requiring all involved to have a Tax Identification Number (NPWP). Therefore, every rupiah paid for the Free Lunch program will be returned to the government in the form of value-added tax and income tax. Of course, to get maximum results, the proportion of imports for the program should be minimized.
Industrial policies related to the development of related industries, particularly the food and dairy industries, must also be implemented. In addition to supporting the Free Lunch program, increasing global trade tensions and geopolitical risks increase the urgency for countries to be selfsufficient for their basic needs.
Regarding the discussion of ICOR (Incremental Capital Output Ratio) and economic limitations, a number of interesting facts arise. In their economic development, countries such as China and Korea can run investment-driven economies and provide maximum impact on their economy because they invest in a world that is moving towards globalization; thus, the positive effects on the economy are seen in the net export aspect. In Indonesia, when we invest without considering domestic consumption growth engines, amid a deglobalization context, we will be trapped in a high ICOR condition, which, at the moment, has reached 6.2. Therefore, it is pivotal to face the incoming global risks and support domestic consumption growth.
Some efforts we can take to improve domestic consumption, including free lunches in this regard, can actually reduce the ICOR level, by stimulating growth in domestic household consumption amid increasingly worsening world geopolitical tensions, and will be a means of an effective countercyclical policy.
In terms of funding, debates always take place about APBN capacity. As previously explained, Indonesia currently needs a bigger fiscal impulse amid the risk of a global slowdown. Widening the deficit to increase spending with a high multiplier is undeniably necessary to boost the economy. Amid our potential to pursue an advanced Indonesia in this global economic slowdown, a breakthrough has become absolutely necessary. Rating agencies have also recently emphasized Indonesia’s ability to increase tax revenues as a definite requirement for improving its ratings. An increase in tax revenues amid the world economic slowdown is only possible by providing a significant boost to the domestic economy.
Meanwhile, other elements can be maximized as sources of funding outside the APBN, including increasing the role of the private sector and state-owned enterprises (SOEs). Currently, Bank Indonesia data shows that funds owned by private corporations in banking have reached the highest amount with a percentage of 33% of total third-party funds, and total SOEs assets have reached IDR 10,000tn. They can play a role in providing a positive impact on the development of the nation’s human capital.
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The appropriate mechanism for attracting the private sector and SOEs must be researched, so that national development targets can be achieved by providing a positive impact on all economic stakeholders.
In conclusion, we must remember that our time is limited. The demographic bonus will reach its peak in the next few years. Meanwhile, the national economy is faced with high liquidity due to sluggish purchasing power and real sector activities. Therefore, the government’s measures to increase the role of distribution will have a much more positive impact on the Indonesian economy in the future.