Q3 Tax revenue drying up: a sign of worsening recession?

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

IO – It was surprising to see that many countries with developed economies have registered a significant improvement in the third quarter (Q3) of 2020. After experiencing a sharp contraction in Q2, they sprang back with amazing economic growth. Countries using the Euro as their currency, collectively called the Euro Area, grew by 12.7% in Q3 compared to the previous quarter (Quarter-on-Quarter, seasonally adjusted/ QoQ sa). 

The European Union has also posted impressive growth of 12.1% QoQ sa. France has reported the strongest rebound of 18.2% QoQ sa. This marked a dramatic recovery from Q2, where the economy contracted by minus 13.7%. Spain and Italy have also enjoyed stunning economic growth of 16.7% and 16.1% QoQ sa, respectively. 

Likewise, the United States has also posted spectacular growth of 7.4% in Q3. Singapore’s economy also showed signs of recovery, as it grew by 7.9% over the previous quarter. 

The data indicates that developed countries mentioned above have started to come out of recession. How about Indonesia? Indonesia’s economic growth rate will only be known by November 5, 2020. 

However, based on tax revenue data, Indonesia’s economy in Q3 is estimated to be still in the doldrums. Tax collection in Q3 has fallen sharply compared to the quarter before. Domestic tax revenue was reported to have dropped by 24.5% to Rp218.9 trillion, from Rp290.1 trillion in Q2. 

The data shows that domestic economic activity in Q3 was much slower than that of the previous quarter. Employment income tax fell by 24 percent. This shows that layoffs or furloughs have increased in Q3, compared to before. 

Corporate Income Tax in Q3 even decreased, by 62%. This indicates that many companies are under great pressure. Many have seen their profits collapse and even experienced significant losses. This, despite the loosening up of the Large- Scale Social Restrictions (PSBB) in Q3. The fear of the pandemic has subsided. People can carry out their activities more freely. But tax revenues fell sharply anyway. 

What is more worrying is that income tax from non-oil and gas operations has also fallen, by 39.4% from Rp174.7 trillion in Q2 to only Rp106 trillion in Q3. Total tax revenues, namely domestic taxes plus customs and excise, dropped by 22.5% in Q3, from Rp345 trillion in Q2 to Rp267.5 trillion in Q3. Thus, tax revenue to  GDP ratio in Q3 is estimated to be very low, may be well under 7%. 

On the other hand, interest expenses are increasing, and imposing a greater burden on the budget. The ratio of interest expense to tax revenue in Q3 reached 29%, which is very high. This, despite the fact that interest expense for this year’s deficit has largely been borne by Bank Indonesia through a financing scheme called “burden sharing”. This means that a certain budget deficit is financed through “money printing” based on Government Regulation in Lieu of Law (Perppu) No. 1/2020 which was ratified into Law No. 2/2020. 

Compared to the same period last year (YoY), tax revenues also fell sharply. Employment income tax in Q3 2020 decreased by 9.5% YoY. Corporate Income Tax has even fallen more sharply, by 51.4% YoY. Domestic VAT and import VAT also decreased by 11.5% and 26.2% YoY, respectively. 

The decline in tax revenue in Q3 2020 (YoY) is much worse than the decrease in tax revenue in Q2 YoY. This means that economic malaise in Q3 was much worse than the minus 5.32% YoY contraction in the previous quarter. We can only hope that the economy in Q3 won’t plunge any deeper.