THE IDEAs WORKING PAPER SERIES

Paper no. 01/2012

Fiscal Policy Evolution and Distributional Implications: The Indonesian experience
Smitha Francis

Abstract This paper analyses Indonesia’s resource mobilisation and public expenditure policies against the backdrop of her inequality trends and macroeconomic policy evolution. It is argued that the country’s fiscal policy stance has been adversely impacted by her monetary and financial sector policies under an open capital account, with attendant regressive distributional implications. Juxtaposing the analysis of revenue mobilisation trends and taxation policies with the evidence of increasing asset and land concentration and persisting high inequalities reveals that the increase in income tax revenue did not necessarily come from the upper income profiles or corporate profits. Meanwhile, although government expenditure to GDP ratio has improved after 2003, capital expenditures and social expenditures other than those in education continue to remain low. Further, the current pattern of fiscal decentralisation does not seem to be effective in addressing the existing disparities. JEL Classification H 200; H 500; H 700 Key Words Indonesia, fiscal policy, public finance, inequality, taxation, revenue, government expenditure, financial liberalisation, IMF debt conditionalities, decentralisation

Smitha Francis is Principal Economist, Economic Research Foundation, New Delhi.

Email for correspondence: smithafrancis@gmail.com

THE IDEAs WORKING PAPER SERIES

01/2012

Fiscal Policy Evolution and Distributional Implications: The Indonesian experience
Smitha Francis*

I. Introduction Indonesia, the world’s largest archipelago-state and the fourth most populous, is a unitary country comprising central, provincial and local levels of government. Under the first president Sukarno (1950-65) and under the thirty