Full Paper Fiscal Stimulus

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The Role Of Indonesias Fiscal Stimulus

In Reviving The Economy During Global Financial Cricis: Fact Or Fiction?

M. Firman Hidayat, SE

Luthfi Ridho, SE

Gaffari Ramadhan, SE

Abstract

Facing the global economic crisis in 2009, there were a lot of debates among policy makers and

academics on the effectiveness of fiscal stimulus in the developed countries. However that was not

the case in Indonesia. Indonesian fiscal stimulus package was signed and implemented without any

dispute or disagreement on whether it will be effective or not in reviving the economy. Moreover, it

was claimed that the fiscal stimulus policy played a major role in keeping positive economy growth

in Indonesia. Differ with that claim, this study argues that fiscal stimulus package had very limited

role in helping the recovery of the Indonesian economy in 2009. This study shows there were

problems in the design and implementation of the fiscal stimulus package, which prevent the policyto be effective during the period of the crisis.

This study evaluates the Indonesian fiscal stimulus using four criterias: (1) timing; (2) target; (3)

implementation; and (4) multiplier effect. The first criteria evaluate the fiscal stimulus package

based on the timing of the package. Text books say that in order to be effective, fiscal stimulus has

to be delivered during the peak of the crisis (not after the process of recovery occur), which was not

happened in Indonesian case. For instance, one of the fiscal instruments, spending for

infrastructures, most of it started and fully implemented in the fourth quarter of 2009. Data shows

at that time the economy has already recovered.

Using the second criteria, the fiscal stimulus package should be well targeted to the most vulnerable

sectors or groups of population. This study shows that some of the instruments used by Indonesiangovernment do not meet the criteria. The third criteria examine the implementations of the fiscal

stimulus package. Our findings indicate there were obstacles in the implementation, preventing the

fiscal stimulus package to achieve its goals.

In order to calculate the multiplier effect of the fiscal stimulus in Indonesia, this study use Total Tax

Revenue and Total Government Spending over the period of first quarter of 2000 to the fourth

quarter of 2010. Using the methodology of SVAR, we would like to investigate their multiplier effect

on Real GDP. The results show that both of tax shock and government spending shock are nto

significant in determining the real GDP. The multiplier effect for tax shock and government

spending are -0.39 and -0.12

Keywords: fiscal policy, tax, national government expenditures


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I. INTRODUCTION

The global financial crisis that began in 2008 has led to the threat of the global economic

recession in 2009. Slowing economic growth gave affects not only to the decreasing of the world

trade volume, but also to the production capacity. Furthermore, the crisis also caused the increasing

of unemployment. The fall of global financial markets caused drastic declines of assets value from

various large world financial institutions. Nevertheless, the uncertainty triggered panic and causedthe flight to quality phenomenon. The shortfall liquidity happened in United States gave impacts to

many countries. The exchange rates of developed and developing countries also experienced high

volatility.

Facing the threat of the global economic recession, almost all countries agreed to resolve by

issuing a fiscal stimulus package. The United States for example, issued a fiscal policy package

which reached US$ 787 billion, either with government spending or tax incentives. Not only the

United States, other countries whether developed or developing countries, including Indonesia, also

implemented the same action. The need of fiscal stimulus package facing the global economic

recession has already became a global agreement in a meeting of G20.

During the global economic crisis in 2009, there were debates among policy makers and

academics on the effectiveness of fiscal stimulus in the developed countries. While the world seems

to agree to rely on this policy, the effectiveness of fiscal stimulus as a countercyclical policy to

overcome the economic recession still appears as a controversial issue. The debate is not only about

the effectiveness of fiscal stimulus, but more specific, such as how large is the actual impact to

whole economy (multiplier effect). The debate continue with the question which fiscal stimulus is

better between increasing the spending or implementing tax incentives. To know exactly about the

effectiveness of fiscal stimulus policy, in-depth research is certainly needed.

However, actually the debate did happened in Indonesia. The fiscal stimulus package was

signed and implemented without any dispute or disagreement on whether it would be effective or

not in recovering the economy. Nevertheless it was claimed that the fiscal stimulus policy played amajor role in keeping positive economy growth in Indonesia during the global financial crisis.

As the opposite of that claim, this study wants to argue that fiscal stimulus package has very

limited impacts in helping the recovery of the Indonesia economy in 2009. This study also wants to

show that there are problems in the design and implementation of the fiscal stimulus package,

which prevent the policy to be effective during the period of the crisis. In this regard, it would be

interesting to know how the effectiveness of this policy in Indonesia, especially considering the

very large allocations for fiscal stimulus package, which reached more than Rp73,3 trillion.

In short, this study will evaluate the Indonesia fiscal stimulus using four criteria: (1) timing;

(2) target; (3) implementation; and (4) multiplier effect. The first criterion will evaluate the fiscal

stimulus package based on the timing of the package. In many ways we can say that in order to beeffective, fiscal stimulus has to be delivered during the peak of the crisis, not after the process of

recovery occurred.

For the second criterion, the fiscal stimulus package should be well-targeted to the most

vulnerable sectors or groups of population. In this study we want to show that some of the

instruments used by Indonesian government can not meet this criterion. The third criterion will


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examine the implementations of the fiscal stimulus package. We will generate our findings

indicating obstacles in the implementation which prevent the package to achieve the goals.

In order to calculate the multiplier effect of the fiscal stimulus in Indonesia, this study will

use tax revenue and government spending as main variables. Through a structural vector

autoregression (SVAR) model, this study tries to find the impact of government spending and tax

cut to GDP.

This study is divided systematically as follows: The first part describes the background of

this study. The second discusses the theoretical debates associated to the fiscal stimulus policy. The

third section explains briefly about the fiscal policy package issued by the government. The fourth

section describes the evalution of the fiscal stimulus using the four criteria. The last section outlines

conclusions from this study.

II. LITERATURE REVIEW

The world seemed turning to the left as the role of the government in the economy hasgotten higher. Even governments around the world today agreed to issue a fiscal policy package as

the countercyclical action to raise the economy from the downfall. The debate related to the role of

government and its effectiveness has not yet been finished. There are still pros and cons with the

fiscal stimulus.

From the pros side, if we consider the recent global financial crisis with the collapse of

financial markets, declining world trades and production capacities, it is difficult for a country to

expect stable contribution of economic activities from investment and export. In this case, the role

of government through fiscal policy appears as the reliable choice. The choice of fiscal stimulus is

also considering the narrowness of the monetary policy space in addressing the collapsed financial

markets. Even so, in order to make fiscal stimulus work well, it should be "Timely, Temporary, and

Targeted" (Furman, 2008). In this regard, fiscal stimulus must be precisely in time, target, and as

well as temporary.

Meanwhile, from the cons side, there are other arguments related to the Ricardian

Equivalence theory and the fear of a crowding out effect. More specifically, Feldstein (2009) said

that one of the reasons of fiscal stimulus ineffectiveness is the time lag between the decision to

conduct and its realization. Time factor as required previously is difficult to meet. As a result, the

fiscal stimulus can lose the momentum. It is probability when the policy is implemented; it

influences the economy after the peak recession. The bad effect is causing additional unintended

demands in the economy which has already begun to grow.

Regardless of the existing pros and cons, previous researches that demonstrated theeffectiveness of fiscal stimulus may vary depending on many factors. Fiscal stimulus policy is

successful in one country, but not necessarily produces similar results in other countries. It was

showed by Ilzetzki, Mendoza, and Vegh (2009) in their research. First, in developing countries, the

impact of the increasing of government spending to boost output is lower and not durable

compared to developed countries. Second, the level of exchange rate flexibility is a determined

variable of the degree of fiscal policy multiplier effect. Countries with a flexible exchange rate

regime have lower multiplier effect rather than countries with fixed exchange rate regime. Third,


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the level of openness of the country (measured by exports plus imports in proportion to GDP) is

also a critical variable. The more open the economy, the lower effectiveness of fiscal policy. Last,

another factor that influences the effectiveness of fiscal policy is the level of the country's debt. In

countries with high debt ratios, an increase in output driven by fiscal stimulus tends to less effective

compared to countries with low debt ratios.

Some researches investigate the impact of speficif instument of fiscal stimulus, such asindividual income tax cut. This policy is intended to increase household consumption expenditure.

By doing so, the economic activity is expected to increase. But in reality, by looking at the

experience of other countries, the results are not always in line with expectations. For example,

Shapiro and Slemrod (2003) in their research in the United States showed that the level of

household consumption expenditure did not experience any changes in lowered tax rates.

Gravelle (2002) showed that the tax cut policy depends on income levels. The country

dominated with households in low income level tends to have a higher marginal propensity to

consume (MPC) rather than the country dominated with high income level households. This means

that when households have an increase in revenue (e.g. the impact of income tax cuts), the low-

income households will have more tendency to increase consumption larger than the group of highincome households. When income rises, the group of high income households would prefer to

increase savings. This phenomenon is also described by Mankiw (2000) as the savers-spenders of

fiscal policy theory.

In practice, there are two other things that need to be considered by the government in

order to be able to change the level of household consumption. First, households will be more

responsive to changes in income tax rates when the policy is usually permanent (Elmendorf-

Reifschneider, 2002). Blinder (1981) has found that if the condition of cutting tax rates is

temporary, MPC of households would be lower than when the tax cut is permanent. This is because

the household takes time to adjust their consumption behavior. Second, the impact of tax cut on

household consumption expenditure tends to arise when the policy is implemented, not when the

policy is announced. Related to this, the issue of time becomes an important factor. The governmentcannot linger on between plan and implementation.

In addition, Tang, Liu and Cheung (2010) investigated the effectiveness of fiscal policy in

five countries of Association of Southeast Asian Nations (ASEAN) such as Indonesia, Malaysia,

Philippines, Singapore and Thailand. By using a structural vector autoregression (VAR) model,

government spending is found to have weak and largely insignificant impact on output, while taxes

are found to have outcomes contrary to conventional theory. Extended study using a time-varying

VAR model reveals the impact of taxes on output mainly reflect heightened concerns over public

finances amid the Asian financial crisis and the recent global financial crisis. On the contrary, for

Singapore and Thailand, there is evidence that government spending can at times be useful as a tool

for countercyclical policy.

III. INDONESIAN 2009 FISCAL STIMULUS PACKAGE

Facing the threat of global financial crisis, Indonesian government launched IDR 73.3

trillion of fiscal stimulus package. The package has three goals: (1) to preserve and improve

peoples purchasing power to maintain household consumption growth above 4 per cent; (2) to

preserve firm competitiveness facing the global crisis; and (3) to improve the employment

absorbtion and cope with firm layoffs through infrastructure projects. Details on Indonesian fiscal


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stimulus package can be seen in table 3.1, with around 70 per cent of Indonesian Fiscal Stimulus

(IDR 56.3 trillion) take in form of tax incentive (tax cut).

Table 3.1: Indonesian 2009 Fiscal Stimulus Package

ITEM ALLOCATION

Budget Law 2009 IDR 56,300

A. Tax Saving IDR 43,000

1 Personal Income Tax Rate Cut (35% --> 30%) IDR 13,500

2 Increasing the limit level of income that is notaccounted in the tax (Pendapatan Tidak Kena Pajakor PTKP)

IDR 11,000

3 Corporate Income Tax Rate Cut (30% --> 28%) IDR 18,000

B. Tax Subsidy/Waivers to Business Sectors IDR 13300

1 Palm Oil VAT IDR 800

2 Plant Oil VAT IDR 200

3 Import Duties Subsidy for input and capital goods IDR 2,500

4 Oil and Gas Explorations VAT IDR 2,500

5 Geothermal Income Tax IDR 800

6 Act 21 Income Tax IDR 6,500

Additional IDR 16,959

C. Nontax Subsidy, Government Expenditure, andFinancing for Business Sectors

IDR 16,959

1 Reduction of Gasoline Price (Solar) IDR 2,779

2 Discounted Peak Load Electricity Tariff for Industry IDR 1,377

3 Community Empowerment Program (PNPM) IDR 601

4 Additional Stimulus IDR 12,200- Interest subsidy for clean water company IDR 15

- Generic medicine subsidy IDR 350

- Revitalization and rehabilitation of primarywarehouse in the food production centers

IDR 120

- Infrastructure projects IDR 11,215

- Capital Injection for Jamkrindo and Askrindo IDR 500

Total IDR 73,259

Source: Indonesian 2009 Fiscal Stimulus Document, Ministry of Finance

In order to achieve the first goal, the government used personal income tax rate cut, whichresulted tax saving up to IDR 24.5 trillion. These tax saving policies consisted of two aspects, i.e. the

reduction of tax rate for each group of household income and the increasing of level of income that

is not accounted in the tax (Pendapatan Tidak Kena Pajak or PTKP). Each of those aspects

contributed to as much as IDR 13.2 trillion and IDR 15.8 trillion additional savings respectively. The

other policies used by government were the subsidy for three commodities, namely cooking oil, bio-

fuels and selected medicines


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For the second goal, the government reduce the corporate income tax rate, from 30 per cent

to 28 per cent. This policy resulted tax saving up to IDR 18 trillion. The government also gave

subsidy for business sector/firm in form of the reduction of gasoline (solar) price and discounted

peak load electricity tariff.

Infrastructure projects were the primary tools in order to achieve the third goal. Indonesian

government allocated IDR 11.93 trillion for infrastructure construction, concentrated on nine typesof infrastructures, namely:

(1) public works infrastructure;

(2) transportation infrastructure;

(3) energy infrastructure;

(4) public housing infrastructure;

(5) special housing infrastructure;

(6) road and irrigation infrastructure;

(7) market infrastructure;

(8) employment training; and

(9) Health infrastructure.

Moreover, the government also allocated 721.5 billion IDR for two program, i.e.

revitalization and rehabilitation of primary warehouse in the food production centers and national

programs of community empowerment (Program Nasional Pemberdayaan Masyarakat or PNPM).

IV. INDONESIAN FISCAL STIMULUS EVALUATION

In order to evaluate Indonesian 2009 Fiscal Stimulus, four criteria are used: timing, target,

implementation, and multiplier effect.

4.1. Timing

Some literatures and previous researches state that timing is the most important factor for

fiscal stimulus policy to be effective as a countercyclical policy during the economic crisis. Fiscal

stimulus should be given at the peak of the economic crisis, not after the economy has started its

recovery process. During the peak of the economic crisis, the economy is under its full capacity and

need stimulus to boost its growth. Often, the only source for stimulus is the government, acts as a

trigger for the economic recovery. However, the case is different when the economy has started its

recovery process. When the recovery process began, the economic activity has started improving.

By adding additional stimulus, it will add unnecessary aggregate demand to the economy. The

result could be an overheating economy.


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fiscal stimulus. Worse, most of the stimulus poured in to the economy at the 4th quarter of 2009

could give unnecessary additional demand to the economy which had started improving.

Figure 4.2: Infrastructure Fiscal Stimulus Monthly Progress

Source: National Development Planning Agency, 2010

4.2. Target

To be effective, fiscal stimulus has to be well targeted. Global financial crisis affect each

economic sectors and population groups differently. Some sectors or groups are more vulnerable

than the others. This paper argues that fiscal stimulus should be directly target and help the mostvulnerable sectors or groups to cope with the global financial crisis.

Population Groups

During the global financial crisis, the most vulnerable population groups were the

households with low income. Moreover, households with low income have higher marginal

propensity to consume (MPC) than households with higher income. When government helps these

households, for example by giving them additional revenue, bigger shares of the additional revenue

will go to consumption. As a result, the multiplier effect will be bigger. Therefore, fiscal stimulus

ideally should target these groups.

Looking at Indonesian fiscal stimulus package, the biggest allocation to help the householddeal with the crisis came in form of the personal income tax cut. Indonesian government reduced its

personal income tax rate to 30 per cent from its previous level, 35 per cent, with high hope that the

household would turn the additional revenue in to consumption. However it was not happened.

Indonesian National Development Planning Agency/Bappenas (2010) did survey to see how

people response to the personal income tax cut policy. The result (figure 4.3) shows that most of

them save the additional revenue (57.69 per cent), 11.54 per cent use the additional revenue as

0.00

4.51

13.93

27.79

47.45

62.85

94.73

0.064.83

14.72

24.95

42.1

57.45

93.61

0

10

20

30

40

50

60

70

80

90

100

Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09

Physical Progress Budget Absorption


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investment, 11.54 per cent pay their debt, and 3.85 per cent do nothing. Only 15.38 per cent of the

respondents increase their consumption.

Figure 4.3: People Response to Personal Income Tax Cut

Source: National Development Planning Agency/Bappenas, 2010

People who eligible for tax in Indonesia are the people who has income more than IDR 15.4

million a year or in average IDR 1.3 million per month. That level of income is higher than the

poverty line in Indonesia and in most of areas, the household with that level of income coud be

categorize as middle income. Furthermore, most of the people who pay tax work in formal sector

since it is hard for tax authorities to identify and collect tax from informal sectors. Normally, formal

worker has a better income, working stability and condition, compare to the informal sectors. In

addition, individu need to have tax payer identity number, for the tax authorities to be able to tax.

Most of the households with low income do not have that luxury.

Looking at the characteristics of the people who pay personal income tax, it can be

concluded that the tax cut did not target the right population groups. The policy is enjoyed by

households with middle income or higher income, not the ideal groups mentioned before. That is

the reason why most of the response showed in Bappenas survey are saving, not consumption.

Higher income households have smaller MPC. They tend to save, not consume their additional

income.

Economic Sectors

Figure 4.4 shows the scatter plot of Indonesian Industry Sectors (3 Digit ISIC) based on

percentage of exported output and imported output. The higher percentage of exported output

means most of the output of industry are exported. Meanwhile the higher percentage of importedinput means most of the input used in the industry supplied by other countries.

The first quadrant shows the sectors of industry with more than 50% of their output are

exported and more than 50% of their input come from imported good. The sectors in this quadrant

really depend on the condition of the international market. Sectors categorized in this quadrant for

example are communication equipments, photographic equipments, and electronic components.

The second quadrant shows sectors which sell most of its output to the domestic market, but used

imported goods more than the domestic goods as their input, i,e: office equipment and motor

11.54

57.69

3.85

15.38

11.54

Investment Saving Pay Debt Consumption Do Nothing


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Regarding to the tax cut and incentives for the corporate or industry, Patunru and Zetha

(2010) wrote:

It is yet to confirmed whether or not such tax cut and incentive were responsible as the

factors that stimulated consumption. In fact, the tax incentives were decided based on

report submitted by business regarding their financial situation and some pre-determined

criteria set by the government. For example, there were three business sectors for whomgovernment intended to allocate the stimulus: agriculture, fishery, and manufacturing, with

a total amount of IDR 6.5 trillion. The criterion used was that the three sectors were

suppliers of basic need and/or export oritented. There were about 146 economic

activities considered in these three sectors and therefore eligible for the stimulus. They

included publishing industry, printing, media recording, base metal industry, paper produts,

machinery and equipments, watch industry, food plantation, fruits, coconut farming, oil

palm, cashew nuts, etc. Furthermor, there was no clear indication as to how government

could monitor the implementation.

Unemployment

One of government fiscal stimulus goals was helping the unemployment caused by layoffs

during the global financial crisis. The main instrument used by the government was the

infrastucture projects. Most of the projects were in construction sectors, such as building road,

bridge, or traditional market. However, table 4.1 shows the layoffs occured during the global

financial crisis were not in construction sectors. Most of the layoffs are in textile, garment,

beverage, furniture, manufacture, plastics, etc sectors, not construction. There was a missmatch

between unemployment caused by layoff during the global financial crisis with the employment

opportunity created by the government using fiscal stimulus.


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Table 4.1: Number of Layoffs During The Global Financial Crisis, By Province

Source: National Development Planning Agency, Directorate of Labor

4.3. Implementation

We find a lot of problems in the implementation of fiscal stimulus package. At least two of

the fiscal stimulus instrument are actually not a stimulus: tax cut and national program of

community empowerment. Tax cut included in fiscal stimulus package is part of amandment of tax

law which has been designed since 2005 and agreed by the legislative in 2008. Since there was the

1. N Aceh Darussalam2. Sumatera Utara 540 Wood

3. Sumatera Barat 398 Rubber, CPO, Coconut

4. Riau 1.697 8.720 1.000 Paper

5. Jambi 489 Manufacture, Agriculture

6. Sumatera Selatan 1.493 40 Plastics, Beverages, Saw Mill, Animal Farm, Plywood, Drink Water

7. Bengkulu

8. Lampung

9. Bangka Belitung

10. Kepulauan Riau

11. DKI Jakarta 16.650 9.847 Garment

12. Jawa Barat 11.890 2.670 Textile, Garment, Electronic, Wearing Apparel, Floss

13. Jawa Tengah 11.928 6.911 Trade, Wood, Beverages, Textile, Plastics, Paper, Printing, Cigarette,

Manufacture, Vehicle, Chemicals, Garment, Services, Craft Industry,

Steel, Furniture

14. DI. Yogyakarta 423 Plastics, Cigarette, Lamp, Craft, Wood

15. Jawa T imur 1.723 800 125 Wood, shoes, Furniture, Cigarette

16. Banten 5.497 1.597 Textile, Transport, Electronic

17. Bali

18. Nusa Tenggara Barat

19. Nusa T enggara T imur

20. Kalimantan Barat 496 5.050 485 CPO, Wood, Rubber, Mining, Construction

21.Kalimantan Tengah 60 Mining, Rubber, Plywoods

22. Kalimantan Selatan 2.165 2.638 Wood, Plywood, Mining, Crumb Rubber

23.Kalimantan Timur 4.774 Wood, Pulp, Mining

24. Sulawesi Utara25. Sulawesi Tengah

26.Sulawesi Selatan

27.Sulawesi Tenggara 43

28.Gorontalo

29.Sulawesi Barat

30.Maluku 515 Mining

31. Maluku Utara

32.Papua Barat

33.Papua 127 Mining, Animal Food

TOTAL 56.134 27.087 17.570

Actual

Layoff

Planned

Layoff

Temporary

Layoff

Province

March 2009 Data

Sectors


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global financial crisis, government put the tax cut as part of the fiscal stimulus package. However, it

did not design specifically to cope with the crisis and it was merely a realization of mandate given

by the law, regardless of the crisis (pantunru and zetha, 2010). Meanwhile the allocation of

community empowerment program in the fiscal stimulus document is actually unabsorbed budget

in the previous year, which carry over to the next year. Once again, it was not actually design to

cope with the impact of the global financial crisis.

The other problems related to the implementation of the instrument of the fiscal stimulus.

First, the personal income tax cut. Because of lack of promotion and socialization of this policy, only

few people know about this policy. It can be seen in the survey done by Bappenas. The survey asks

whether the respondent know and understand about the personal income tax cut policy. They are

given three options: (1) know and understand; (2) do not know; (3) know but do not understand.

Only 24.64 per cent of the respondents choose option 1 and 43.48 percent of them never know

about this policy.

Figure 4.5: People Awareness and Knowledge About Personal Income Tax Cut Policy

Source: National Development Planning Agency/Bappenas, 2010

Second, tax subsidy on act 21 income tax. In this policy, corporates can claim their employee

income tax to the government. However, since the corporates afraid that the employee will ask the

same incentives in the next year when this policy has stopped, most corporate decided not to use

this incentives.

Because of the problems in the implementation, the realization of personal income taxincentives policy at the end of 2009 is only 79.70 per cent. Meanwhile the realization of corporate

income tax reachs 100 per cent.

Third, the import duties. At the end of 2009, the realization of this policy is only 0.29 per

cent. The low realization rate was caused by relatively late implementation of this policy. Firm or

corporate usually signs contract to buy input goods in the beginning of the year, meanwhile the

policy effectively implemented in the second semester of 2009. This policy was not effective also

43.48

24.64

31.88

Do not know Know and understand Know but do not understand


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due to the lower demand of imported goods, as a response of lower demand and increasing price of

imported goods due to the global financial crisis.

Fourth, the infrastructure projects. Problems in the implementation of infrastructures

projects can be divided into three parts: (1) the budgeting process, caused by lack of supporting

regulation, complicated administration, and accounting process; (2) problems in process of tender;

(3) problems in the implementation. To be more specific here are problems occured in theimplementation of infrastructure projcets

- Transportation infrastructure: unabsorbed budget caused by problems in budgetting, i.e: inthe construction of konawe harbour. Some of the projects cancelled due to natural disaster,earthquake, i.e: Carocok Padang Harbour.

- Housing infrastructure: in some case, there was Contract Change Order (CCO) due to acertain technical condition. It cause delay in the construction some the housing, i.e: inKabupaten and Kota Bandung. Meanwhile, housings build for fisherman in Biaknumforwere cancelled due to land problem.

- Labor infrastructure: there was overlapping activities between ministry of labor andBNP2TKI.

- Traditional market infrastructure: projects were cancelled in Jasinga, Bogor, West Java andSiborong-borong, North Tapanuli. The same case was happened in Penajam, EastKalimantan due to land availability.

Because of the problems occured in the implementation, the realization of fiscal stimuluspackage is only 83.84 per cent.

Table 4.2: Fiscal Stimulus Realization Rate

Policy % to Budget

Tax Cut 81.44

a. Personal Income 79.70

b. Corporate Income 100.00

c. VAT 52.43

d. Import Duties 0.29

Government Spending 91.81

a. Subsidies 91.93

b. Government Transfer to Corporate 100.00

c. Infrastructure Projects 91.43

Total 83.84Source: Ministry of Finance, Modified

4.4. Multiplier Effect

4.4.1. Methodology

Traditionally, macroeconomics hypothesis tests and forecasts were conducted using large-

scale macro econometric models. A complete set of structural equations usually was estimated one


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equation of a time. Then, all equations were aggregated in order to form overall macroeconomics

forecasts.

Sims (1980) points out that unless these sets of equations are considered as a system in the

process of specification, the behavioral implications of the restrictions on all equations taken

together may be less reasonable than the restrictions on any one equation taken by itself.

Furthermore he argued that it should be feasible to estimate large scale macro models by treatingall variables as endogenous.

In order to blend economic theory and multiple time series analysis this paper will use

Structural VAR model to analyze the contemporaneous relationship among macro economic

variables. The aim of a structural VAR is to use economic theory to recover the structural

innovations from the residuals. The goal of this paper is to find if whether the time path of a

dependent/endogenous variable, which is the GDP, to be influenced by the time path of an

independent/exogenous variable. These exogenous variables are represented in shocks,

constructed to capture the effect of fiscal stimulus in the economy.

A standard S-VAR decomposition takes the following form:

1t, 2t and 3tcan be identified from the estimates of e1t, e2t and e3t. An alternative way to model the

relationship between the forecast errors and the structural innovations in a standard model is:

The above equations are also known as the identification restriction. One can modify or change the

equation to suit the analysis. However, any modification that lies outside or have no theoretical

background will produce implausible findings.

The forecast error of each variable is affected by its own structural innovation and the

structural innovation in one other variable. The necessary condition for the exact identification is

satisfied. However, imposing (n2 n)/2 restrictions are not a sufficient condition for exact

identification. In addition, the presence of non-linear means there are no simple rules that

guarantee exact identification.For the purpose of calculating the impact of a fiscal stimulus, this paper will follow

Blanchard and Perotti S-VAR framework. The framework relies on institutional information on the

tax and transfer system and the timing of tax collections to separate the autonomic response of

taxes and government spending to economic activity.


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There are two particular strengths to this framework. First, discretionary fiscal policy is

generally exogenous to output. Second, there will be very little or no discretionary response of fiscal

policy to unexpected contemporaneous economic activity within the quarter.

The identification restrictions of the Blanchard and Perotti SVAR can be expressed as a class

of AB SVAR model in Amisano and Giannini (1997) in matrix form:

Where: A is a nn matrix of contemporaneous relations among the variables ; tis the vector ofthe

normally independently distributed reduced form residuals with variance-covariance. E (t't);

B is a nn matrix that allows some shocks to affect more than one endogenous variable in the

model; andUt is the vector of structural shocks of policy and non-policy variables, where

Ut~N(0,In) andE(UtUs) = 0, forts.

Expanding the above matrix and denoting the three variables as taxes (tx), government spending

(s), and real GDP (y) gives:

The first equation state that unexpected movements in taxes in the current quarter ( are related

to unexpected movements in economic activity (

, structural shocks to taxes (, and structural

shocks to government spending (

. The same applies to the rest of the equation.

From matrices A and B, there are nine parameters that need to be estimated based on six

knowns, which means further three restrictions have to be imposed. First, Blanchard and Perotti

estimate a13, the elasticity of taxes to GDP separately. They follow the calculations of Giorno et al.

(1995), which depend on the summation of the elasticity of each tax category weighted by the tax

base.

In this paper, following Tang, Liu and Cheung (2010), a13 is estimated from a simple

regression of taxes on GDP. Second, they assume a23, the elasticity of government spending to GDP,

is zero. This essentially assumes there is no automatic feedback from economic activity to

government purchases of goods and services within the quarter. It is important to recognize that

both , a13 and a23can potentially be affected by the discretionary fiscal policy changes with respectto economic shocks. Yet realistically due to the lag in policy implementation, it is unlikely either a13

or a23can capture the discretionary fiscal policy effects especially with the use of quarterly data.

Third, they decide to letb12 be zero, implying that tax decisions are made before spending

decisions. This means a tax shock affects spending contemporaneously and not the reverse. Since

there is no straightforward way to determine this, they also try the reverse, that is, by letting b21be

zero so thatb12can be estimated. Their results as in our case are robust to this change. Hence, for

simplicity, we continue to letb12 be zero.


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4.4.2. Data and Estimation

Quarterly data of GDP, Net Taxes and Government Spending from 2000:1 to 2010:4 are

acquired and disaggregated from the National Development and Planning Agency. The Net Taxes

and Government Spending are collected from the State Budgeting (APBN) data. All data areseasonally adjusted using the standard X11 methodology.

The net taxes are collected directly and disaggregated into quarterly by a proportion that is

internally calculated from the NDPA. Meanwhile, government spending that are related to the fiscal

stimulus are calculated using the state spending only for the following posts: the expenditure for

working capital, expenditure for capital, social security grant, sharing funds, general funds and

special allocated funds. These calculations are solely justified and based on a solid ground.

Following Blanchard and Perotti, all data are expressed in natural logarithm. In addition, the

estimated a13, or the elasticity of taxes to GDP, is 0.6. These results are similar with Tang, Liu and

Cheung (2010).

4.4.3. Results

In general, our model simulation shows that there are no significant influences from the Net

Tax and the Government Spending to Output (GDP). Below is the computer output:

From the output above, it is shown that C(6) and C(7) are not significant. Whereas, C(8) is the only

coefficient that significant. This result suggests that the movement of GDP in Indonesia were

determined only by the movement of its own residual.

Model: Ae = Bu where E[uu']=I

Restriction Type: short-run text form

@e3 = 0.66*@e1+C(2)*@u3

@e2 = C(4)*@u3+c(5)*@u2

@e1 = C(6)*@e3 + C(7)*@e2 + C(8)*@u1

where

@e1 represents DGDPTOTSA residuals

@e2 represents DTAXTOTSA residuals

@e3 represents DSPENDTOSA residuals

Coefficient Std. Error z-Statistic Prob.

C(6) -0,00523 0,009418 -0,55505 0,5789

C(7) -0,01444 0,020879 -0,69135 0,4893

C(2) 0,051068 0,00564 9,055385 0

C(4) 0,007483 0,003484 2,147966 0,0317

C(5) 0,021669 0,002393 9,055385 0

C(8) 0,002901 0,000321 9,041172 0


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Meanwhile, by dividing the impact response on GDP to shock in net tax with the average net

tax to GDP, we find the multiplier effect for tax shock, which is -0.39. The negative sign means

positive relation between expansionary fiscal policy through tax cut with positive GDP growth.

Dividing the impact response on GDP to shock in government spending, we find the multiplier

effect for Government Spending, which is -0.12.

One reason we find consistent expansionary impact on output with the positive shockexplained by Tang, Liu and Cheung (2010) that fiscal adjusment have been more commonly carried

out through tax changes. Nevertheless, the negative sign in government spending shock could be

caused by the choice of exchange rate regimes. Ilzetzki, Mendoza, and Vegh (2010) finds, there will

be weaker, tend to be negative and statistically insignificant, output response to a government

spending shock in economies adopting a flexible exhange rate.

The impulse responses (to structural One S.D innovation 2 S.E) are represented below:

Figure 4.6: Impulse Response Functions

Response of GDP to shock in Spending

Response of GDP to shock in Net Taxes

Response of GDP to shock in GDP


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V. CONCLUSION

Looking at the monthly progress of infrastructure projects, we find a significant lag betweenthe moment the document signed and the implementation of fiscal stimulus. This lag creates

timing problem, since fiscal stimulus entered the economy not at the peak of the crisis, but

at the time the economy has started its recovery process. This condition could create an

unnecessary additional aggregate demand to the economy. This also indicates that the

economy recover without much help from fiscal stimulus.

Some of the fiscal stimulus used are not well targeted to the most vulnerable economic

sectors or population groups. The personal income tax cut, for example, enjoyed mostly by

household with middle and high income.Meanwhile there were policies not directly

targeted to help the vulnerable sectors or help industry to cope with the crisis. Moreover,

there was a missmatch between unemployment caused by layoff during the global financial

crisis with the employment opportunity created by the government using fiscal stimulus. There are a lot of problems in the implementation of fiscal stimulus package. At least two of

the fiscal stimulus instrument are actually not a stimulus: tax cut and community

empowerment program. Those policy were not design specifically to cope with the crisis.

Other problems in the implementation are related to technical matters, such as promotion

and socialization problems in personal income tax cut and firm did not want to claim tax

incentive for its employee. Moreover, problems in infrastructure projects can divide into

three parts: (1) budgeting process; (2) problems in process of tender; (3) problems in the

implementation. Specific problems occured in some infrastructure projects, such as natural

disaster and land availability.

Using SVAR methodology, we find there is no significant impact on GDP to shock in tax and

government spending. Calculating the multilpier effect, there is a consistent expansionary

impact on output with the positive shock, but not with government spending. The multiplier

effect for tax shock is -0.39, and for government spending is -0.12.

Based on the result of all evalution criteria, we find problems in Indonesian Fiscal Simulus,

starts from its timing, target, implementation, and multiplier effects . Those problems shows

no support to the claim that fiscal stimulus play a major role in reviving indonesian

economy during the global financial crisis.


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References

Bappenas. 2010. Monitoring and Evaluation of Fiscal Stimulus. Deputy of Evaluation of

Development Performance. Jakarta.

Bappenas. 2010. Impact Analysis of Fiscal Stimulus on Indonesian Economy. Deputy of Economy.

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Economy, 89(1), pp. 26-53.

Desai, Mihir A., Goolsbee, Austan D., Investment, Overhang, and Tax Policy (Brookings Papers on

Economic Activity, 2004), 285 338.

Elmendorf, Douglas W. and Reifschneider, David (2002), Short-run Effects of Fiscal Policy with

Forward-looking Financial Markets, National Tax Journal, 55 (3), September.

Enders, Walter.,Applied Econometric Time Series (John Wiley & Sons, Canada: 1995)

Feldstein, Martin S (2009), Rethinking the Role of Fiscal Policy , NBER Working Paper, No. 14684,

January.

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Committee on Finance, January.

Gravelle, Jane G (2002), Tax Cuts and Economic Stimulus: How Effective Are the Alternatives?

Congressional Research Service, April.

Gujarati, Damodar N., Basic Econometrics, (McGraw-Hill, New York, 2003)

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Centre for Economic Policy Research, Policy Insight, No. 39, October.

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Policy Review, Vol.6 No.4 April 2010. Policy Research Institute, Ministry of Finance Japan

Mankiw, N. Gregory (2000), The Savers-Spenders Theory of Fiscal Policy, The American Economic

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Ministry of Finance, 2009. Indonesia Fiscal Stimulus Budget.

Pattillo, Catherine., Poirson, Helene., Ricci, Luca., Through What Channels DoesExternal Debt Affect Growth ?, (Brookings Trade Forum, 2003), 229 277.

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22/22

261 Gelas - glass 43,85 29,62

252 Barang dari plastik - Plastic products 45,5 29,17

263 Tanah liat - Clay 42,35 26,47

313 Kabel listrik - Electrical cable 42,14 25,81

155 Minuman - Beverages 10,3 16,11

222 Percetakan - Printing 0 13,43

264 Semen, kapur, dan gips - Cements, lime, and gips 17,5 9,43154 Makanan lainnya - Other food 38,83 6,81

371 Daur ulang logam - Recycling of metals 0 4,44

342 Karoseri kendaraan - Motor vehicles bodies 0 0,59

353 Pesawat terbang - Aeroplane 0 0,02

223 Reproduksi rekaman - Recording reproduction 0 0

Quadrant IV- (31/66 =47% )

312 Alat Pengontrol listrik - Electrical control 67,77 48,97

181 Pakaian jadi kain - Wearing apparels textiles 84,78 45,84

271 Logam besi dan baja - Iron and steel 58,88 45,8

314 Akumulator listrik - Electrical accumulator 71,45 45,18

289 Logam lainnya - Other metal products 51,03 44,22173 Perajutan - Knitting 55,61 43,76

172 Permadani - Carpets 54,88 40,82

272 Logam bukan besi dan baja - Non iron and steel 72,11 40

323 Radio dan sejenisnya - Radio and other similar products 51,08 39,01

315 Bola lampu pijar - Bulb spotlight 51,91 37,74

269 Barang galian non logam - Non metallic mineral 58,1 36,8

319 Alat listrik lainnya - Other electrical equipments 56,97 36,49

281 Logam untuk bangunan - Fabricated structural metal 68,27 34,33

191 Kulit, barang - Leather and good leather 71,85 31,77

210 Kertas - Paper 57,65 28,86

171 Benang dan Kain - Yarn and Textiles 53,11 28,81

265 Barang dari batu - Goods from stones 55,04 25331 Peralatan dokter - Medical equipments 61,69 21,35

273 Pengecoran logam - Metal smelting 57,31 13,77

351 Pembuatan kapal - Controuction ships 56,98 10,42

160 Tembakau - Tobacco 61,57 8,81

361 Furnitur - Furniture 85,33 7,64

202 Barang dari kayu - Goods from wood 83,29 5,08

232Barang dari Minyak dan Gas Bumi - Goods from oil andgas 74,35 4,95

251 Karet - Rubber 87,72 3,74

221 Penerbitan - Publishing 72,01 3,32

174 Kapuk - Kapok 97,56 1,88

372 Daur ulang bukan logam - Recycling non metal 78,82 1,09201 Penggergajian kayu - Sawing of wood 79,48 0,95

151 Makanan olahan - Processing Foods 66,62 0,65

231 Barang dari batu bara - Goods from coal 100 0

Source: Industrial Statistics, Bureau of Central Statisitcs, 2007, Modified

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