Indonesia : Selected Fiscal Issues in a New Era

Abstract

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.