Indef: Government Spending Boosts Domestic Demand Since Early This Year

Jakarta – The Head of the Macroeconomics and Finance Centre at the Institute for Development of Economics and Finance (Indef), M. Rizal Taufikurahman, has stated that the acceleration of government spending since the beginning of the year has helped maintain domestic demand.

He mentioned that social assistance spending, government projects, and priority programs are the main factors supporting domestic demand in the first quarter of 2024.

A report from the Central Bureau of Statistics (BPS) shows that government spending grew by 21.81 percent and contributed 1.26 percent to the formation of GDP in the first quarter of 2024, which recorded a growth of 5.61 percent.

“Government spending in the first quarter is an important pillar of economic growth amid weak middle-class consumption and a slowdown in manufacturing,” said Rizal.

However, he highlighted that the effectiveness of government spending is not yet optimal, given that most of it is still driven by routine spending. Meanwhile, the manufacturing PMI has fallen close to the stagnation zone, and people’s purchasing power still needs support.

“This means that fiscal policy is currently functioning more as a buffer against economic slowdown rather than a driver of new expansion,” said Rizal.

For the next quarter, Rizal believes that the impact of government spending will continue to support growth, but the room for acceleration is starting to be limited if the private sector has not fully recovered.

The strategy of front-loading the state budget is considered to have helped maintain growth in the first quarter of 2024 above 5 percent, but its sustainability depends on the quality of spending.

“If spending only encourages short-term consumption without strengthening investment, industry, and job creation, then the multiplier effect will quickly weaken,” said Rizal.

Therefore, he recommends that the government expand its focus from accelerating budget absorption to ensuring productive spending. According to him, government spending needs to be directed towards programs that have a high multiplier effect and are able to attract domestic investment.

“This strategy is important to implement in order to maintain growth in the second half of the year, so that it does not experience a moderation,” he said. (Ant)