The Burden of Redistributive Policy

Kumba Digdowiseiso
Over the past few days, I saw many economists keep arguing about the governments
timing to rise the fuel-price. Clearly, if they involve in the discussion of an uncertainty
science in which the outcome of the policy became so unpopulist, particularly to the poor,
then the debate will keep going on. But since politicians have shed some light on this issue,
questioning nationalism principle of a newly-crown Finance Minister, Chatib Basri, the
debate should be directed to the redistributive policies in the framework of supply-side
economics.
Lets put it simply, our fiscal capacity would be better off if we lessen the energy
subsidy. Right now, this subsidy accounted for almost 19 % of central-government spending
in 2012 and will reach about 24.1 % in the 2013 budget. By contrast, spending on education,
healthcare program, social assistance and infrastructure remains insufficient (about 7.3% in
the last-year state budget realization). Based on a medium-term economic projections in the
Government Work Plan (RKP), it is necessary to rethink the idea that the expenditure policy
is needed to facilitate the 2014 establishment of public health insurance and to alleviate the
budget deficit by 2015.
The government should act fast because the magnitude of delaying the fuel-price
increase will likely to raise doubts in financial markets and thus, create the fiscal instability.
An excalation of energy subsidy in the event of a rise in the current global oil price will boost
overall spending directly. Couple with an increase in education spending, in which the
government must allocate a minimum of 20 % in their spending, will put a risk of hitting the
3% of GDP deficit barrier. Consequently, this sum of all fears will lead to a decrease in
spending in growth-enhancing programmes and that would be a detrimental factor to achieve
a sustained-long-term growth. A partial solution for the government is rising the revenues
from the oil and gas sector. However, since there is a continual decline of oil and gas lifting,
we cannot over-reliance on them.
Suppose the government raises the fuel-price in the near future, reallocating energy
subsidy into high-quality spending programs is a prime priority at the short-term to prevent
an excessive increase in the fiscal burden. A targeted and conditional cash-transfer schemes to
compensate poor households, a similar method to those introduced in 2005 and 2008,

combined with a widespread communication on this program would not only protect the poor
but also settle with obstacle to reform.
The spending could also be improved at the regional level. At the moment, civil service
excretion represents more than 75 % of regional expenditure. In most regions, they are totally
funded from the General Allocation Fund (DAU), which accounted for about 31,41 % of the
national expense. Consequently, the specific purpose grants (DAK) will be the only shortterm incentive to finance their capital expense, despite it contibutes to just 2 % of the national
expense . Alternately, a moratorium on the recruitment of new-public-service employees
enacted in mid-2011 is viewed as tools to achieve both national and regional budget at the
right track over the medium term. However, this strategy must be accomodated by a
comprehensive bureaucratic reform, including a review of pay scales and performance
management.
The government will also deal with the need to finance the social safety net programs
and infrastructure. Lowering energy subsidy would create fiscal space, but these programs
will also need to be facilitated. One thing for sure, the government has no other choice but to
effectively mobilize revenue from taxes. Although it has increased over the years, the
proportion of this ascension lied in the stagnancy phase for a while. The tax-to-GDP ratio is
still relatively low (below 13 %), compared to other developing countries such as Malaysia
(about 16.5 %) and Thailand (about 18.1 %). To some extent, this might be an evident of a
decrease in the filling ratio (the ratio between taxpayers that actually pay taxes and registered
taxpayers who are unable to afford the individual income tax, the commercial income tax,
and added value tax) due to a tax evasion or a rise in informal economy. Pertaining to the
former, there was some evidence in tax officials who are committed to fraud was caught by
anti-corruption committee (KPK).
Unlike Indonesia where approximately 63 % of the number of working people lie in the
informal sector, recent examples from Latin America countries show that significant
increases in tax revenues are possible despite producing 25 to 35% of aggregate output from
informal activities. According to the 2013 Budget, the tax-to-GDP ratio is expected to remain
stable at 12.4 %, despite an increase revenue from added value tax (VAT). Over the short
term, raising tax revenues would be proceeded by implementing a good governance in
taxation, including good tax policy that can minimize unnecessary economic costs of
taxation.
Here, Basri will face with the sustainability of tax holiday. Corporate income tax rates
in Indonesia have declined to 45 % of the income tax revenue, closing to other 6 ASEAN

countries which is estimated around 29 %. As a consequence, Foreign Direct Investment

(FDI) inflows have been increasing as they grew by 18.5% in 2011.
Basically, the tax holiday is the mainstream of supply-side economics in which the cuts
should be directed to those with enough wealth. Such tax-cuts will stimulate investments,
which will create jobs, higher productivity, and ultimately, economic growth. Eventually, this
growth will produce a rise in employment. Incomes generated by the employee provide
bigger tax payments, which will contribute to a budgetary surpluses.
However, while further corporate tax cuts might attract more FDI, a number of other
factors may play important roles such as infrastructure and governance. The government
should also anticipate whether the new money might simply sit in the bank, or be spent on
lavish personal consumption, or wasted in misdirected speculation, or be invested in foreign
markets.
The writer is a Lecturer at School of Economics at National University, Jakarta and a
Development Economic Specialist at Directorate General of Regional Development, Ministry
of Home Affairs. The opinion expressed is my own.