Government debt increases: blessings or disasters?

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Ninasapti Triaswati, S.E., M.Sc., Ph.D Teaching Staff of the University of Indonesia

IO – Government debt as an instrument to improve people’s welfare can be seen as a double-edged knife, because it can be a “blessing” but may also be a “disaster” in the future.

Indonesian history and world history have proven that the origin of colonialism in various regions was partly due to enormous government spending and calculated as debt to other nations, which then must be paid off with the most valuable assets for the state, namely “control of land” and “sovereignty”. At the household level, many people are in debt and have their property confiscated by a lender.

Public concern about the management of Indonesian government debt has now been answered by the Ministry of Finance of the Republic of Indonesia on the website kemenkeu.go.id titled “Answering Debt”. In that article basically, the Ministry of Finance stated that “Debt is a good thing if managed properly”. The argument is that the debt needed by the Indonesian government to encourage the economy to continue to grow because the current state budget has a deficit, that is, state spending is greater than state revenue.

More explicitly, the article states that government debt is “safe” because it is used for productive spending. The large expenditure is mainly for infrastructure development and connectivity, improving the quality of human resources through education, health, and social protection.

The increase in the ratio of debt to GDP still complies with Law No. 17 of 2003 concerning state finances, namely the ratio of debt to GDP is less than 60 percent.

The Ministry of Finance also stated that debt management is good because of the following 3 risk indicators:

First, the portion of foreign ownership in government debt continues to decline from 44.5 percent in 2015 to 38.6 percent in 2018, which means that the risk of debt from the Rupiah exchange rate against foreign currencies can be reduced, Indonesia’s debt is not affected if there are external influences globally.

Second, an increase in the ratio of debt with a fixed interest rate to total government debt from 86.3 percent to 89.6 percent over the past 4 years, means that the risk of government debt is not too deeply affected by the unstable market situation (floating).

Third, the increase in the ratio of debt that has matured more than 3 years to total government debt increased from 21.4 percent to 26.5 percent means the risk of the burden of government debt payments in the short term has been on a downward trend, so that the annual budget will not be burdened by debt installments and can be allocated for other productive expenditure.

An outline of the philosophy of debt according to the Ministry of Finance in its website includes:

First, debt is not a prohibited practice if it is used for additional capital to finance development.

Second, the government strongly adheres to this principle and is committed that every Rupiah debt carried out must be utilized to finance productive activities and investments in the long term – that cannot be delayed.

Third, long-term debt investment, among others, is used to finance infrastructure, education, and health spending, which will produce a large multiplier effect for current and future generations.

Fourth, debt is a diverted tax. With the understanding that a long-term investment will produce greater economic benefits in the future, which in turn will result in additional tax revenue in the future that can be used to pay back debt, made at this time.

Fifth, what the government is doing now and in the future by economic calculation is sharing benefits that are far greater than the burden.

The writing on the Ministry of Finance website is very confident that the debt policy will bring “blessings” and not bring “disasters” in the future.

Fears of a “catastrophe” due to the size of Indonesia’s rapidly growing government debt began with the physical collapse of various infrastructure buildings in various regions financed by debt. The low quality of buildings is an indication of irregularities in the management of infrastructure funds.

This was followed by various findings of the Corruption Eradication Commission (KPK) regarding corruption in infrastructure spending at the central and regional levels. The effectiveness and efficiency of government spending is a key factor whether future “benefits” will be greater than the “costs” incurred.

The downgrade of Indonesia’s competitiveness by 5 ratings from the previous year in the 2019 Global Competitiveness Report published by the World Economic Forum has also indicated that government spending financed by debt is not yet effective in increasing Indonesia’s competitiveness.

The task of ensuring the effectiveness and efficiency of government spending is not only the task of the Ministry of Finance, but it becomes homework of the government as a whole, namely the executive, judicial and legislative bodies at both the central and regional levels. Comprehensive, hard, and smart work of the government and the people are needed to ensure that the benefits of government debt will outweigh the costs, so they avoid future disasters.