Testing Fiscal Credibility During Crisis and Covid-19 Pandemic

Economic crisis is like a recurrent disease, especially after the Great Depression in the time of Malaise (1929). It alternately attacks the health of a country, region, or even the world, whose triggers and epicenter could differ on each case. This year, 2020, the recurrent disease strikes almost the entire world again, including Indonesia.

This time it is a Corona Virus Disease 2019 (Covid-19) that becomes the source of the global crisis. This virus has killed more than 177 thousand lives, infected more than 2.5 million people, and imprisoned billions of the world's population in their homes. Indonesia is the country with the highest number of Covid-19 positive cases in Southeast Asia and ranked 36th out of 212 countries in the world exposed to this virus, based on World Health Organization (WHO) data released by worldometers.info.

The Covid-19 pandemic does not only affect the physical and mental health of individuals, but also tear apart humanity, disrupt social relations, and damage the liberal economic order that had been built up since World War II. To stop its spread, almost every country restricts — or even prohibits — social and economic activities. A number of international financial institutions simultaneously cut the forecast for global economic growth in 2020, from previously positive to near or even negative. Even, the International Monetary Fund (IMF) warns of the possibility of the danger of the Second Great Depression if this deadly outbreak is not immediately controlled. Therefore, the economic stimulus policy is the most realistic step for countries affected by the pandemic.

Deja Vu 

In Indonesia, Covid-19 has forced most employers to halt their business operation. Some conduct termination of employment (PHK), some of which lay off their employees without giving wages. Not a few companies also try to survive – without knowing until when it is – by implementing work from home.

So far, based on the Ministry of Manpower's calculations, more than 2 million workers have been laid off, which is a tough decision that must be taken by employers and bad news that must be received by workers. The condition that if allowed to drag on will have an impact on increasing poverty, due to a lack of income to meet the needs of clothing, food, and shelter. When unemployment is rampant and poverty is gaping, what also needs to be watched out for is social and political turmoil, as well as the risk of security disturbance.

Other economic indicators also show deterioration. The rupiah exchange rate against the United States dollar (USD) plunged freely and touched IDR16,824.71/USD (Bank Indonesia's middle rate) on 2 April 2020, which was the worst level in Indonesian history. The panic also occurred in the capital market, following the collapse of the IDX Composite (Indeks Harga Saham Gabungan/IHSG) to around 4,000 only within a few days, after previously having struggled to break the 6,000 level.

Read: Corona, Oil War, and the Complexities of Our Economy

While the performance of export and import, which has been weakening in recent years, is getting worse with the traffic restrictions of humans and goods in various countries. On the other hand, the increased demands for a number of basic necessities and medical goods, cause scarcity and potentially trigger a surge in price. The efforts of the government and Bank Indonesia to keep inflation low are threatened to fall apart if supply chain issues are not immediately handled properly. In general, these conditions cannot be tolerated because they potentially pose the risk of stagnation or even drag the Indonesian economy into the brink of recession.   

The story above is like bringing our memories back to the times of crisis at the end of the Old Order (Orde Lama) or even more severe than the 1997 economic and political crisis that triggered the downfall of the New Order (Orde Baru). The difference is in the previous crises, the Micro, Small and Medium Enterprises (MSMEs/UMKM) sector can still survive so that it can be an economic buffer to rise. But this time, Covid-19 strucks all layers of the economy indiscriminately, so the impact is hard to imagine. Fiscal instrument is again required to play an important role in mitigating the negative effects of the global economic crisis, while reducing the effect of the Covid-19 pandemic in the midst of the classic twin deficit problem (trade balance and State Budget deficits).

Fiscal Stimulus

The government budgeted additional funds of IDR405.1 trillion to support the Large-Scale Social Restrictions (Pembatasan Sosial Berskala Besar/PSBB) policy while simultaneously save the economy and the national financial system from the toxic impacts of Covid-19. The additional funds are allocated for the national economic recovery program of IDR150 trillion, additional funding in the health sector of IDR75 trillion, social safety net program of IDR110 trillion, as well as tax incentives and stimulus for the People's Business Loans (Kredit Usaha Rakyat/KUR) of IDR70.1 trillion.

With the additional budget, the government is forced to change the State Budget deficit limit from 3% of Gross Domestic Product (GDP) to 5.07% of GDP. Concerning the funding, certainly, it must be reinforced from debt, considering that the taxation condition is currently difficult to rely on. At the same time, the economic growth target is corrected from 5.3% in the 2020 State Budget to 2.3% in a moderate scenario, or even minus 0.4% when considering the worst case scenario. The legal basis is the Government Regulation in Lieu of Law (Perppu) Number 1 of 2020 and its implementing regulations, which until this writing is made "flood of regulations" never stop. 

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In terms of taxation, the incentive package provided by the government includes:

1. Income Tax Article (ITA) 21 is borne by the government (DTP) for certain processing industry sectors workers with an income of up to IDR200 million a year,

2. Exemption from import tax for 19 specific sectors, the Taxpayers and Small and Medium Enterprises (SMEs/Industri Kecil Menengah/IKM) who obtain facilities for         Import Facility for Export Purposes (Kemudahan Impor Tujuan Ekspor/KITE), 

3. Reduction of ITA 25 by 30% for certain sectors, the Taxpayers and IKM who obtain facilities for KITE,

4. VAT refund is accelerated for 19 specific sectors,

5. Reduction of Corporate Income Tax rates to 22% for 2020 and 2021 and to 20% starting in 2022, and a reduction of 3% lower rate for Resident Taxpayers in the form of a Publicly Traded Company (Public Limited Liability Company) with a minimum of 40% of its shares traded in the Indonesia Stock Exchange,

6. Imposition of Value Added Tax (VAT) and Income Tax for electronic transactions, and

7. Extension of the application/tax administration settlement period. 

All of these incentives should be appreciated in the current crisis conditions, especially ITA 21 borne by the government policy for the next six months. This facility is expected to increase the amount of income received by workers, thereby increasing the purchasing power of people, especially workers.

Unfortunately, the coverage of ITA 21 borne by the government recipients is limited to workers in certain industrial sectors, who earn up to IDR200 million a year. In fact, almost all business sectors are hit and the termination of employment does not only occur in formal sectors, but also many workers in informal sectors were laid off.

Therefore, it would be better if ITA 21 borne by the government facility is also given to all workers in all business sectors. If the fiscal burden is too large to cover ITA 21, the limit of the income a year could be lowered or not necessarily up to IDR200 million. The period of granting ITA 21 borne by the government facility also needs to be reviewed, it shall not be locked for six months. Thus, incentives can be stopped at any time if Indonesia can be freed from the Covid-19 pandemic sooner than the estimated six months, or vice versa it can be extended if necessary.

Debt Paradox 

Talking about fiscal is not merely a matter of tax and state spending. There is a debt component that covers the difference in lack. According to Mankiw (2000), optimal fiscal policy in most countries requires conditions of a budget deficit or surplus. This is linked to three fiscal functions as a means of stabilization, tax smoothing and intergenerational redistribution.

Read: Aligning Accounting Standard with Tax Regulations

Therefore, there is nothing wrong with debt as long as it is used to finance productive activities, resulting in positive output. The wrong thing is to withdraw debt without being balanced with the ability to manage and return it. Do not let the debt pile create a financial crisis such as that ensnares a number of European Union countries recently.  

Indonesia has also experienced the same problem. Radius Prawiro, Minister of Finance in 1983-1988 in the book Era Baru Kebijakan Fiskal (2000), tells us that statistics from Bank Indonesia and Statistics Indonesia (BPS) are unable to describe the severity of Indonesia's economic disaster in mid-1966. Aside from being poor and bankrupt, Indonesia also bears the debt burden that has pushed Indonesia into a poverty trap for decades thereafter. External debts – which were often wrapped up in terms of foreign aid – were then the only source of funding for the "Socialism State Budget Indonesia style.” The debt inheritance is increasing in line with the spirit of the development of the New Order. Instead of curbing fiscal, aid and debt were camouflaged into the state revenue component in order to maintain the spirit of "Balanced and Dynamic State Budget." Before finally the financing component was separated from revenue into a separate allocation in the State Budget in line with the spirit of transparency in the reform era to the present.

As time passes, the financing instruments are getting richer in variety. Bonds then became the main source of government funding other than external debt – which drew much public criticism after the signing of the IMF Letter of Intent (LoI) in 1998.

In relation to the Covid-19 pandemic crisis, Minister of Finance Sri Mulyani Indrawati during the Live Media Briefing (7/4) said that the 2020 State Budget will face pressure from all sides, either revenue, expenditure, or financing. She estimated that 2020 state revenues — taxes, customs and excise, and State Non-Tax Revenue (PNBP) — will experience a shortfall of around 10% (IDR472.3 trillion). Meanwhile, financing is ensured to surge significantly in line with the widening of the 2010 State Budget deficit to IDR853 trillion (5.07% of GDP) from IDR307.2 trillion (1.76% of GDP) in the 2020 State Budget.

Learning from the bitter experience of the debt crisis, the government must be careful in attracting funding by looking for sources of financing that have the smallest risk. Especially the withdrawal of external debt and the issuance of forex bonds that are vulnerable to global pressures and exchange rate fluctuation. 

One thing is for sure, the government cannot cope this crisis alone, so it needs support and criticism from all parties. Bank Indonesia as the monetary authority must balance fiscal stimulus with easing macroprudential policies. Meanwhile, for the Financial Services Authority (OJK), do not let the relaxation of credit rules ignore its main task as a supervisor of bank operations and nonbank financial institutions.

Moral Hazard 

It must be realized that the Indonesian economy is currently facing a more dynamic world economic climate, filled with uncertainty and high volatility. Thus, adequate fiscal flexibility is needed for the government to respond and answer to the turmoil and dynamics that occur. However, the fiscal flexibility must also prioritize three things, namely efficiency, effectiveness, and accountability.

The third point is no less important for the government to consider. Especially in the middle of the public spotlight on the impunity clause for policy makers in Perppu No. 1 of 2020, which is considered potentially to misuse (moral hazard). Bank Indonesia Liquidity Assistance (Bantuan Likuiditas Bank Indonesia/BLBI) and the rescue of Bank Century are examples of crisis response policies that have been dragged into the criminal realm and become a prolonged political polemic until now. These conditions must have been considered by the government, including the final decision of the Constitutional Court later on judicial review of article about impunity of Perppu No. 1 of 2020 by a number of parties.

We never know what the future will be like because even the crisis that occurs today no one can predict it beforehand. Therefore, a sense of crisis must be built and become the basis in preparing the State Budget. One lesson that can be learned from the economic crisis is the importance of maintaining fiscal management that prioritizes prudence, sound, and sustainability. Therefore, it would be wise if all parties – especially the government – deepen the message of a senior American artist, Maya Angelou: “Hoping for the best, prepared for the worst, and unsurprised by anything in between.”  

 

Disclaimer! This article is a personal opinion and does not reflect the policies of the institution where the author works.