Indonesia : Selected Fiscal Issues in a New Era
Despite the substantial progress in managing its fiscal challenges post-1997 financial crisis, Indonesia's risks to the budget have not disappeared, though the Government continues to be committed to fiscal consolidation. While debt sustainability is improving, the budget remains vulnerable to shocks, and, large non-discretionary spending (interest payments, transfers to the regions, personnel spending) still constrain the use of fiscal policy for macroeconomic stabilization, and social risk protection, and, as the fiscal situation improves, and decentralization proceeds, a rethinking of resource allocation becomes necessary. This report assesses Indonesia's progress in dealing with challenges that have altered the fiscal system since the crisis, and reviews options for fiscal consolidation, as well as sectoral issues in the new decentralized environment, including public expenditure management reforms. Suggestions include an increased revenue mobilization to make the budget more risk proof, and an improved tax administration, rather than streamlining the tax structure alone, while the Government's decision to eliminate the fuel subsidy remains critical for fiscal consolidation (which has little social implications). Moreover, the large interest payments burden incurred during the crisis, is crowding out development spending, and similarly, increased transfers to local governments are limiting discretionary spending (which could be accompanied by a decrease in central development spending in areas of regional responsibilities). A refinement of the budget management system is necessary, where the Finance Law would be instrumental in establishing accountability between the Executive, and Parliament.
| Summary: | Despite the substantial progress in
managing its fiscal challenges post-1997 financial crisis,
Indonesia's risks to the budget have not disappeared,
though the Government continues to be committed to fiscal
consolidation. While debt sustainability is improving, the
budget remains vulnerable to shocks, and, large
non-discretionary spending (interest payments, transfers to
the regions, personnel spending) still constrain the use of
fiscal policy for macroeconomic stabilization, and social
risk protection, and, as the fiscal situation improves, and
decentralization proceeds, a rethinking of resource
allocation becomes necessary. This report assesses
Indonesia's progress in dealing with challenges that
have altered the fiscal system since the crisis, and reviews
options for fiscal consolidation, as well as sectoral issues
in the new decentralized environment, including public
expenditure management reforms. Suggestions include an
increased revenue mobilization to make the budget more risk
proof, and an improved tax administration, rather than
streamlining the tax structure alone, while the
Government's decision to eliminate the fuel subsidy
remains critical for fiscal consolidation (which has little
social implications). Moreover, the large interest payments
burden incurred during the crisis, is crowding out
development spending, and similarly, increased transfers to
local governments are limiting discretionary spending (which
could be accompanied by a decrease in central development
spending in areas of regional responsibilities). A
refinement of the budget management system is necessary,
where the Finance Law would be instrumental in establishing
accountability between the Executive, and Parliament. |
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