INDEF: Budget efficiency requires a combination of policies to maintain the deficit

The Institute for Development of Economics and Finance (INDEF) has stated that plans for budget efficiency need to be supported by a combination of other policies to effectively maintain the state budget deficit (APBN). Head of INDEF’s Centre for Macroeconomics and Finance, M Rizal Taufikurahman, when contacted by ANTARA in Jakarta on Friday, explained that the current fiscal pressures are structural, stemming from energy subsidies, rising debt interest costs, and the need for priority spending. Therefore, budget efficiency policies cannot stand alone in keeping the deficit under control. “For that reason, a combination of policies is needed,” he said. In general, he assessed that the government’s room for budget efficiency is still adequate but limited and must be applied selectively. Realistic efficiency space only comes from non-priority spending, considering the increasingly tight spending structure, particularly for energy subsidies, employee spending, and debt interest. “In practice, this ranges from 5-10 percent of discretionary spending, not total spending. If cuts target productive spending, the risk is a weakening of growth, especially amid slowing household consumption,” Rizal explained. The implementation of budget efficiency must also ensure it meets spending quality standards, so its role is not merely savings. Key indicators to assess the effectiveness of budget cuts include increased programme impact relative to the budget, improvement in the Incremental Capital Output Ratio (ICOR), a shift to productive spending, and stability in macro indicators such as growth above 5 percent and controlled inflation. “In addition, more even budget absorption throughout the year is also an important signal. If efficiency only results in underspending without increased output, the impact will instead be contractionary for the economy,” he added. To counter these pressures, Rizal highlighted room for policy optimisation through increased revenue, outcome-based spending reprioritisation, and credible financing management. These various efforts are deemed necessary to be implemented simultaneously with budget efficiency implementation. “Without that, efficiency will only serve as a short-term buffer, while deficit pressures could increase in the second half of the year,” he concluded.