PERPPU and a “blank check” for unlimited budget deficits

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Anthony Budiawan Managing Director of Political Economy and Policy Studies (PEPS)

 IO – The COVID-19 pandemic accelerated a crisis mode for the Indonesian economy. The shadow of economic collapse is clearly visible. The government, caught unawares, has panicked and is not at all ready to face an economy spiraling downward. Panic has caused the government to lose its mind. The source of the Corona virus havoc that triggered the panic did not receive adequate attention. When the outbreak began, there was not a single policy designed to limit the spread of the Coronavirus. Indonesia instead opened its doors as wide as possible, providing a stimulus for the tourism sector. Give discounts on the prices of airplanes, hotels, and restaurants! All this while other countries restricted flights from foreign countries, especially from China as the center for the spread of the plague. 

As time passed, the spread of COVID-19 became increasingly out of control. It swept across the world, paralyzed international trade and dragged the entire global economy to the brink of recession. Meanwhile, the development of COVID-19 in Indonesia is increasingly worrying. The number of people infected has risen sharply. The number of patients dying is far greater than those recovering. 

The future of Indonesia’s economy is very bleak. Rupiah broke through IDR 17,000 per US dollar in early April 2020. The lowest of all time. Layoffs are becoming hard to avoid. Many companies will go bankrupt and leave bad debts, which will drag the financial sector into a crisis. 

The government is increasingly unready to face this situation. The handling of COVID-19 is uncertain. Health facilities and equipment to combat COVID-19 are inadequate and in fact endanger the lives of medical personnel. The number of medics who have died in Indonesia is one of the highest in the world. 

However, havoc can sometimes become a savior. The COVID-19 pandemic, which was originally a disaster for the Indonesian economy, can be used as an excuse for an emergency. In such a scenario, the government can directly enact laws unilaterally to crank up the budget deficit and at the same time, finance, through the issuance of Government Regulation in place of Laws (PERPPU). No kidding, this PERPPU cuts right through a thicket of applicable regulations and laws. 

Among other things, changing the maximum budget deficit which, according to the law, can be a maximum 3 percent of GDP, into an unlimited amount, valid for 3 years, from 2020 to 2022. This really needs to be clarified: the maximum limit of the budget deficit is not limited, not 5 percent as many assume. Maybe the 5 percent limit is only for forming opinions at first. And indeed, it has been quite successful. Many people think that way, while in fact the reality of the budget deficit is not limited. 

The deficit in the 2020 state budget immediately jumped to 5.07 percent, or around IDR 852.9 trillion. Increased by IDR 545.7 trillion over the previous deficit target of IDR 307.2 trillion. And this budget deficit can rise again, as long as necessary because it is unlimited and may continue into 2021 and 2022. 

In addition to the budget deficit, the government has also budgeted IDR 150 trillion for an economic recovery program, to help bankrupt companies as part of the total stimulus package of IDR 405.1 trillion. The budget for the economic recovery program is not included in state expenditures. Can it be? Let the Parliament judge it. If this IDR 150 trillion expenditure is recorded as a “state expenditure”, the budget deficit then reaches 6 percent of GDP. 

Overall, the funding needed for the 2020 revised state budget is around IDR 1,076 trillion. The government should have an unspent IDR 220 trillion by the end of 2019, namely from the Overbalanced Budget (SAL) resulting from the excess debt withdrawal in previous periods. But strangely, only IDR 70 trillion is being used to finance the 2020 revised state budget, so that the remaining IDR 1,006 trillion must be met with new debt. If all SAL funds of IDR 220 trillion are used for financing, the government only needs to issue new debt of IDR 856 trillion. 

The government immediately steps on issuing foreign debt of 4.3 billion US dollars. Why foreign debt? Why not domestic debt? Because the purpose of this foreign debt is to strengthen the Rupiah exchange rate which has been plummeting. 

Management of state finances and debt management like this will turn into a time bomb. Government debt will mount and burden the state budget. The ratio of interest payments to tax revenue will swell, even more than 20 percent. That is, for every Rupiah of tax paid by the people of Indonesia, 20 percent is diverted simply to pay debt interest. And this portion of the payment goes into foreign pockets. So pathetic.