Improving Public Debt Management
In the OIC Member Countries
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C) Policy RecommendationsDebt management and debt policy cannot be assessed in isolation. The size of the debt is a
result of decisions made on the size of the expenditures and the size of the revenues. The
assessment of the size of the deficit is in addition dependent on the structure of spending and
taxation. A higher government deficit may be acceptable if the additional funds are put to
productive use such as transport infrastructure or education which may have high returns,
while a deficit of the same size would be a reason for concern if it was used for rather
inefficient investments such as energy subsidies or unproductive government consumption. As
the government of Indonesia has focused on improving infrastructure a possible increase in
budget deficit in the future may be a reflection of increased productive public investment.
First of all the central government debt is managed competently, effectively and transparently.
Nevertheless there are certain recommendations for the Indonesian Government.
The share of foreign currency denominated debt might be reduced as the domestic capital
market further develops. This would reduce exchange rate risk; yet it requires that domestic
industries have sufficient funds available and are not unduly crowded out. Thus, a gradual
approach is called for. It is central to fiscal policy to keep the government budget deficit in
check while spending effectively and productively. This has major implications for the revenue,
expenditure and debt dimension.
Additionally overall government revenues should be enhanced as Indonesia has a low
revenuetoGDP ratio in international comparison. This requires an improved tax
administration and a broadening of the tax base as tax compliance is suboptimal. Key elements
include a simpler tax system with fewer exemptions and lower thresholds, in particular a
reduction in exemptions for VAT and corporate income tax, and a simplified tax code, a move
towards riskbased auditing, electronic tax filing and cross checks between VAT statements,
possibly a moderate increase in the VAT rate, and a change in attitude towards a regulatory
partnership between tax authorities and tax subjects. The government has launched multiple
initiatives to that effect already including a tax amnesty program and the central challenge will
be to implement these changes effectively (HamiltonHart and Schulze 2016). Furthermore,
regulatory policies those are likely to increase economic growth may also increase revenues
and thereby reduce the size of the budget deficit. Such policies include more liberal trade and
investment policies, the abolition of the remaining energy subsidies and an effective
competition policy.
Moreover, the public expenditures that enhance productivity and competition should be
prioritized. The current government’s focus on improving physical infrastructure in key areas
is very sensible as Indonesia’s infrastructure is ailing compared to its regional competitors
(World Bank 2016). The increase in expenditures that this implies could be mitigated by
reducing nonessential spending in other sectors and by improving revenue generation.
Lastly, since revenueimproving measures will be effective only with a time lag, a temporary increase in the deficit is acceptable. However, in order to maintain investors’ confidence in
Indonesia’s macroeconomic stability it is advisable to strictly honor the three percent deficit
ceiling laid down in Law No. 17/2003. Hence, term government deficit should be reduced
again in the medium.