State Budget crisis looming

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

IO – Tax income has been a cause of concern for the past few years. It has always been far below the target set by the Government in the State Budget. Tax income growth has also been lower than economic growth or Gross Domestic Product (“GDP”) rate, causing the tax income ratio to GDP to consistently drop in turn. Tax ratio in 2008 was relatively promising at 13.3%. In 2019, it dropped to 9.7%, raising the State Budget deficit to a record rate of IDR 353 trillion. The State Budget deficit in 2005 was only IDR 14.4 trillion.

As we enter 2020, Indonesia’s economy worsened instead. Tax income in January 2020 dropped again. In comparison to the 2020 State Budget target, total tax earnings (tax income plus customs and excises earnings) were only IDR 84.66 trillion, or only 4.5% of the State Budget target of IDR 1,865.7 trillion. This is an extremely low achievement that can trigger a State Budget crisis if tax income does not drastically improve soon.

January 2020 tax earnings dropped 6% from those of January 2019, at IDR 90.04 trillion. Corporate tax income fell the most, at 29.34%, meaning that domestic corporate performance for the month has dropped. It is no wonder that many companies were forced to implement major layoffs. In view of current economic conditions, we expect layoffs to continue for some time.

The drop in earnings means that the repayment of Government debt interest burdens the State Budget. January 2020 debt interest was IDR 22.5 trillion, or 26.62% of the entire tax income for the month at IDR 84.66 trillion. Most of this debt interest payment flows outside the country, as about 60% of Government debts are to foreign creditors. With such a great debt interest ratio to tax income, State Budget 2020 is extremely depressed, which means that the State’s expenditures, and in turn the economy, contracts.

State expenditures in January 2020 were only IDR 139.8 trillion, down 9.1% from those for the same period the previous year, at IDR 153.9 trillion. Other than possibly causing a recession due to a sluggish economy from lowered State expenditures, the State Budget deficit would also increase. The January 2020 State Budget recorded a deficit of IDR 36.14 trillion, or 11.8% higher than target the 2020 State Budget deficit at IDR 307.23 trillion. This continued increase in the deficit will burden the State Budget in upcoming terms, and will eventually trigger a State Budget crisis for certain.

As if that is not bad enough, the Government continues to take on more debt than is necessary to cover State Budget deficits. In January 2020, it contracted IDR 68.2 trillion in new debt, while our deficit rate was only IDR 36.14 trillion. The excess IDR 32.07 trillion debt was for “magiconomics” – to magically shore up the Rupiah exchange rate. Thanks to this “doping” practice, our currency continues to increase in value even though economic fundamentals merrily continue to crumble. Financial management just wants to please the Man, while this artificial strengthening of Rupiah exchange rate will drop exports and increase imports in the long run.

Economic issues continue to pile up, one after another. The Corona virus, or Covid-19 plague, centered in Wuhan, China, has been spreading globally since January 2020. This disease corroded the global economy. Countries are expected to go into recession, including Indonesia. Mobility of goods and people are obstructed. Trans-border flights drop drastically. Indonesia’s tourism takes a direct hit.

China is the world’s production center. Covid-19 obstructs production. Economic growth in China, and in the whole world, will be sharply corrected throughout Q1 of 2020. For example, the great Japanese car manufacturer Nissan has closed down one of its big factories in its home country because spare parts supply from China have been interrupted.

Indonesia is also starting to feel the impact of this illness. The construction of the Jakarta-Bandung rapid train is slowing down. Indonesia’s exports to China in Q1 of 2020 will definitely crash. Indonesia’s economy will be depressed and tax income will contract further. The Ministry of Finance has started to panic: it is finding new, creative ways to get our citizens to part with their money. This includes new levies to make it seem legal – after cigarette levies, now they are pushing for levies on plastic bags and packaging, sweeteners, and more motor vehicle levies.

Lord knows what kind of levies they are thinking of imposing next. However, all these panic-induced policies will turn into a boomerang later, as they will further speed up economic decline and lower tax income. The Ministry of Finance should be very careful what taxes and levies they impose, because these will only hurt the people and the President instead. There have been too many cases of regional and state leaders all over the world who met their bitter end due to excessive taxation throughout history. Remember the infamous American saying: “No taxation without representation”!