Worrisome condition of State finances and fiscal management

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

IO – Recently, there have been rumors that the State Treasury is near-empty, and tax refunds for taxpayers are being delayed. Is this true? What is the country’s actual financial condition? 

Our State financial and fiscal condition (i.e. the State Budget) is in fact currently quite worrisome. Until Q1-2019, tax income is far below the figure set in the 2019 State Budget. Domestic tax payments (including customs) in Q1-2019 is only IDR 270.33 trillion. Meanwhile, international trade tax income, comprising of import and export duties, only marked IDR 9.62 trillion. This makes total tax, customs, and excise income in Q1-2019 at IDR 279.95 trillion. In other words, the achievement was only 15.67% of the 2019 State Budget target. That is so low and a big concern. 

Such poor performance means that tax income ration against the GDP has dropped to only 7.4% in Q1-2019. This extremely low ratio is a burden on the national economy, as the State Budget deficit will rise alongside State debts. In other words, it will be difficult for this low State financial condition to stimulate our economic development. 

The 7.4% tax ratio is a large concern, as it has been the lowest quarterly tax income ratio that we ever had and part of a continuous downtrend. In 2008, tax income ratio was 13.3%, decreasing in 2014 to 11.36%. In 2017, tax ratio dropped again to 9.89%, which is already below 10%. The increase of global oil prices and the fall of the Rupiah exchange rate in 2018 raised that year’s income ratio slightly to 10.25%. However, in Q1-2019, tax ratio dropped back to a mere 7.40%. Tax ratio is calculated as follows: Tax income = IDR 279.95 trillion, divided by GDP nominal value of IDR 3,782.4 trillion, multiplied by 100%. If there are no significant improvements in tax income, a State Budget crisis might occur soon. In other words, the State Budget deficit will reach 3%, which is the maximum allowable limit set by the law. 

However, State expenditures are low, meaning that the Government does not have the power to improve national expenditure and economy. Until Q1-2019, actual State expenditure has been 18.37% of the total State Expenditure budget in the 2019 State Budget. The percentage of actual State expenditures is higher than the percentage of actual state income, at only 15.67%. Nominally, State expenditure in the Q1-2019 State Budget is IDR 452.06 trillion, causing a deficit of IDR 101.97 trillion. 

This Q1-2019 actual deficit is quite large, at 34.45% of the 2019 deficit target, or IDR 296 trillion. In comparison with GDP, the Q1-2019 State Budget deficit is already 2.7%, much bigger than the 2019 deficit target at 1.84%. Therefore, the Government must be very careful. If this State income and expenditure trend continues, the deficit rate will absolutely grow closer to 3% of the GDP. 

State financial management has recently also become a cause for concern. Our fiscal and debt management policies are mostly directed to intervene with the exchange rate. State debt should only be used to cover a State Budget deficit, but the Government deliberately takes on much bigger debt than the actual State Budget deficit recently (called “pre-funding” by the Ministry of Finance), in order to cover deficits in the upcoming period. This is what laymen call “ijon”, taking on debts before the current period matures. The Ministry of Finance performed this pre-funding in December 2018 at USD 3 billion, and repeated this maneuver in January and February 2019. 

The January 2019 State Budget deficit is only IDR 45.77 trillion, but debts for budgeting totaled IDR 122.53 trillion. State Budget deficit until February 2019 was only IDR 54.61 trillion, but we called in IDR 197.56 trillion in debt. This pre-period debt is astounding, and we suspect that it is to be used to intervene with the Rupiah exchange rate. In other words, this much money is to be wasted to keep the Rupiah exchange rate from depreciating further. The recent strengthening of Rupiah exchange rate is thus artificial; it is not real, not based on the strengthening of economic fundamentals. 

Such State financial management is not free. There are fees, large fees, even, attached. This will cause the Government’s debt interest rate to increase. In Q1-2019, debt interest rate in the State Budget is IDR 70.58 trillion, or 25.21% of total tax, customs, and excise income. Such high interest rates will help raise the possibility of a State Budget crisis.