CORE: Budget efficiency must be ensured not to hinder economic activity

Indications of efficiency are no longer just trimming ‘fat’ but are starting to cut into ‘muscle’, making the room to press down on spending without disrupting the economy increasingly narrow.

Jakarta (ANTARA) - Economist from the Center of Reform on Economics (CORE) Yusuf Rendy Manilet stated that budget efficiency policies must be ensured not to hinder economic activity and revenue stagnation.

Yusuf, when contacted by ANTARA in Jakarta on Friday, said that the government currently still has sufficient room to cut spending, but it is becoming more limited and very much determined by the quality of the efficiency.

“In the current situation, indications of efficiency are no longer just reducing ‘fat’, but are starting to enter ‘muscle’, so the room to press down on spending without disrupting the economy is becoming increasingly narrow,” said Yusuf.

In general, if the cuts are focused on administrative spending or ministry/institution (K/L) programmes with low impact, then the effect of budget efficiency on economic activity is relatively minimal.

However, when efficiency starts to touch spending that has a high multiplier effect, including some strategic programmes and spending that drives the real sector, the impact can spread to economic growth.

“If the economy continues to grow quite well, tax revenues are not pressured, and the composition of spending shifts to more productive sectors, then efficiency can be said to be running effectively,” explained Yusuf.

“Conversely, if spending cuts are followed by a slowdown in economic activity and revenue stagnation, then in substance, the policy is not yet optimal because it actually weakens the future fiscal base,” he continued.

Yusuf acknowledged that budget efficiency policies can hold pressure in the short term, including to keep the State Revenue and Expenditure Budget (APBN) deficit under control.

Especially if the policy is implemented at the beginning of the year when revenues are still supported by seasonal momentum such as Ramadan and Eid al-Fitr.

However, the challenges in subsequent periods are greater because there is a risk of economic growth slowing when spending is pressed. In the end, tax revenue growth could also be held back.

Therefore, Yusuf said that spending efficiency is not enough to keep the deficit under control until the end of the year, because there is a trade-off between spending savings and the sustainability of the revenue base.

“Keeping the deficit healthy requires a combination of policies, not just spending discipline, but also efforts to keep economic activity moving so that the revenue side is not eroded,” he stated.