Sustainability of fiscal policy and government revenue-expenditure nexus: the experience of Indonesia

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.