Fiscal Governance Must Be Strengthened to Optimise State Spending
Airlangga University economics professor Rahma Gafmi has stressed that strengthening governance must be a central pillar of fiscal policy. This is crucial, she said, to ensure every rupiah of state spending is used optimally and delivers maximum economic impact for the public.
According to Rahma, the formulation of the Macroeconomic Framework and Fiscal Policy Principles (KEM-PPKF) should not rely solely on conventional macro assumptions such as economic growth, inflation, interest rates, exchange rates, and oil and gas lifting. She urged the integration of performance-based governance indicators and structural legal certainty into the framework.
“In order for every rupiah of state spending to truly produce an optimal multiplier effect, the macroeconomic framework needs to take into account performance-based governance indicators and structural legal certainty,” Rahma told Media Indonesia on Tuesday (18/8).
Rahma explained that there has been a linear assumption that economic growth will automatically follow the nominal size of state spending, in line with the classical Keynesian approach. However, she cautioned that the effectiveness of economic impact depends heavily on where and how the money circulates domestically.
The government has been urged to pay closer attention to spending efficiency at the regional level. Rahma highlighted the ratio between public service or infrastructure output and the budget input expended. If efficiency is low due to bloated bureaucracy or slow programme execution, then the portion of Regional Transfers (TKD) and capital expenditure needs to be evaluated in growth projections.
Beyond efficiency, the velocity of money in sectors connected to domestic supply chains is key. “The multiplier effect will be optimal if economic leakage can be suppressed, so that state spending does not stall in less productive financial instruments or flow towards imports,” she added.
Regarding the economic growth target of around 6%, Rahma warned of the risk of qualityless growth or jobless growth if it is not accompanied by improvements in the quality of growth. Without policy direction focused on added value and job creation, the growth figure is vulnerable to being eroded by rent-seeking practices and cost mark-ups.
This risk is increasingly evident in prestige projects or capital-intensive investments with minimal oversight. High-technology projects often have a high dependence on imported capital goods and foreign experts, limiting their contribution to the domestic economy or resulting in import leakage.
“Rent-seeking practices divert resources from productive and inclusive sectors to certain sectors that only benefit a small elite or groups close to power,” Rahma asserted.
The impact of weak governance, according to Rahma, is the concentration of growth benefits among certain groups only. Meanwhile, labour-intensive sectors such as SMEs, manufacturing, and modern agriculture risk lacking access to financing and incentives.
She also highlighted the potential for investment cost overruns due to structural corruption. Projects that should improve long-term logistics efficiency could instead become a fiscal burden or debt if their utilisation rates are low and they do not match market needs.
“Economic growth must ensure its benefits flow to productive sectors, expand employment, and increase real incomes,” she concluded.