LPEM UI: Maintaining Inflation Is The Key To The Success Of The 3 Percent Fiscal Deficit Next Year

Illustration (Photo: Doc. Ministry of Finance)

JAKARTA – The University of Indonesia's Institute for Economic and Community Research (LPEM UI) provided a response regarding the draft for next year's state financial management which is summarized in the Macroeconomic Policy and Principles of Fiscal Policy (KEM-PPKF) 2023.

LPEM UI economist Teuku Riefky said one of the important mandates was the 3 percent fiscal deficit limit in the APBN in accordance with Law No. 2 of 2020.

According to him, in order to achieve this, the government needs to pay attention to spending allocations and optimizing revenues. However, it is still necessary to ensure that the ongoing economic recovery does not slow down.

“The key is how we can deal with current inflationary pressures so as not to disrupt ongoing economic growth. So this momentum needs to be maintained so that the wheels of the economy slacken," he said in a written statement quoted on Friday, June 3.

Riefky added that the upward trend in inflation was clearly visible from April 2022 which was recorded at 3.5 percent. In his view, this is influenced by rising global commodity prices, seasonal factors such as Ramadan and Eid, as well as the recovery in domestic demand.

“Let's say that if inflation is suddenly very high now, surely BI (Bank Indonesia) will increase interest rates. If BI increases interest rates, our GDP (gross domestic product) growth will definitely be depressed again. The implication is that it will be increasingly difficult to achieve a 3 percent deficit next year because our GDP growth is falling,” he said.

Not only that, Riefky also assessed that monetary tightening like those carried out by many other countries will only lead to a higher debt cost burden, thereby narrowing the government's fiscal space going forward.

Therefore, he reminded that if inflationary pressure reaches a point that is too high and the increase is not proportional to the additional fiscal space that comes from commodities, then the inflation must be passed on to consumers while still protecting the poor and vulnerable.

“So I think the problem we are currently facing is how we have the right timing from a policy perspective so that the economic recovery process can occur smoothly. This smooth landing really needs to be paid attention to by the government," Riefky concluded.