Fiscal consolidation and sustainability
Fiscal CONSOLIDATION and fiscal sustainability are the words in the past three years that have been the most expressed by the fiscal authority. However, I am sure that those two words are not well understood by ordinary people so that they are only buzz-words used to hide the real problem.
That is, we sometimes emphasize the importance of fiscal consolidation without actually implementing it. An example is the case of a swelling budget deficit that some time ago was reported by the government. The deficit is likely to reach IDR 30 trillion or around 1.5% of GDP. In fact, initially only targeted around 0.8% (Ubaye on Overview of Foreigh Policy in Consolidating Development).
Indeed, this swelling is still manageable because the government receives additional revenue from oil revenue sharing and the rest can be covered with a precautionary fund that is always prepared every year. Of course we understand very well that this swelling is a direct consequence of the increase in fuel subsidies which is likely to reach more than Rp60 trillion, depending on developments in world oil prices and the dollar exchange rate.
The increase in world oil prices can no longer be seen as something beneficial. Before the reformation era, rising oil prices always created windfall profits. Now, it creates a deficit burden. We also understand that the increase in world oil prices is outside the government's control. This is like an accident. But, have we ever been prepared or on guard to avoid the accident? That is the problem. We never prepare an umbrella before it rains.
The purpose of fiscal consolidation is to create fiscal sustainability.
Fiscal indeed we face a serious problem because it is too burdened by debt. Approximately one third of the government budget must be allocated to pay interest and debt repayments. As a result, the government does not have enough room to fund development. Government investment expenditure, including for infrastructure strengthening, is now only two percent of GDP. A level that is extremely low and is not even enough to compensate for depreciation and damage to basic infrastructure such as roads and public facilities that are getting worse like they are today.
The paradigm used by the government and parliament is to try to reduce the budget deficit, and in 2006 or 2007 the budget was balanced. By definition, debt stock will be able to be reduced if the government is able to create a surplus. Without that, the government has to dig holes close the hole, pay old debt by creating new debt.
But, there are two basic questions from this approach. First, is this policy an appropriate alternative and in accordance with current economic conditions? And secondly, even if this approach is considered appropriate, has it been implemented correctly? Both are still big question marks.
FOR the first thing, there are already too many economists, including Stiglitz, who argue that reducing the budget deficit when the economy has not recovered from the crisis is a step that has not even been done in developed countries. This is tantamount to providing diet therapy for people who are very thin. What should have been done instead was creating a fiscal stimulus by increasing the development budget. At the time of the great depression
in the 1930s, US President FD Roosevelt actually increased the deficit to finance labor-intensive development projects such as dams, roads and railroads.
At that time, the reason was that leaving unemployed and hungry people far more dangerous than the budget deficit. Now, in the World, with 10.3 million people who are openly unemployed and 29 million who are underemployed, it feels too rash if the government continues to prioritize reducing the deficit. Not to mention the number of poor and starving people who are still 38 million people. The priority should be to create jobs and eradicate poverty. The failure to overcome these two problems has proven to have contributed to the defeat in the past presidential election. That is, pressing the deficit is not at all attractive to the people.