Sustainability of fiscal policy and government revenue-expenditure nexus

the experience of Indonesia

Rudi Kurniawan

Research output: Contribution to journalMeeting abstract

Abstract

This paper empirically examines the issue of fiscal policy sustainability in Indonesia. To do so, we analyse the evolution of key fiscal indicators-debt, budget deficit, revenue and expenditure-over time. It is found that the fiscal policy in Indonesia has been responsible and conservative. The budget deficit has been maintained below 3 per cent of GDP with a decreasing trend in the public debt-to-GDP ratio from 2001 to present. We then test the fiscal sustainability based on the government intertemporal budget constraint (IBC) framework using a data set covering the period 1982 - 2010. The IBC framework requires the stationarity of public debt and total deficit as well as cointegration of government revenues and expenditures. We find that all the variables of interest are stationary, which favours a conclusion that fiscal policy in Indonesia has been sustainable during the sample period. We proceed by analysing the nexus between government revenue and expenditure. Granger causality tests are consistent with the tax-and-spend hypothesis, that government revenue causes government expenditure. In controlling budget deficit and sustaining fiscal sustainability, Indonesia should pursue a robust fiscal policy aimed at raising revenue and controlling expenditure.
Original languageEnglish
Pages (from-to)51-52
Number of pages2
JournalExpo 2012 Higher Degree Research : book of abstracts
Publication statusPublished - 2012
EventHigher Degree Research Expo (8th : 2012) - Sydney
Duration: 12 Nov 201213 Nov 2012

Keywords

  • fiscal policy sustainability
  • Indonesia
  • intertemporal budget constraint
  • Granger causality
  • generalised impulse response

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