Sri Mulyani Indrawati has long been one of the most highly respected finance ministers in Asia. She has a reputation for being unwilling to sacrifice the country’s long term financial well-being for short term policy goals. But this year she proved that when crisis hits, she is willing to act decisively.
Indonesia has announced impressive spending plans in response to the pandemic, including increases in social security and the offer of tax breaks, loan guarantees and subsidies to hard-hit businesses. These efforts tally to less than some countries in Asia, particularly Singapore and Malaysia. The great change, however, has been temporarily abandoning a once-sacrosanct budget deficit target.
Indonesia has been committed to keeping its budget deficit below 3% since 2003, when it moved to shore up its finances in the wake of the Asian financial crisis. The deficit cap has become a key source of confidence in the government, long associated with the steady hand on the tiller that Indrawati represents — she was finance minister between 2005 and 2010, before returning to the job in 2016.
But the government is now willing to see its budget deficit go beyond 3% until 2022, giving it wiggle room to announce new spending plans. It expects the deficit to hit 6.3% this year.
The sharp increase in the deficit is largely down to the Rph695tr ($47.2bn) fiscal spending plan the government has announced, increased from an earlier Rph405tr plan, but it was also pushed higher by tax breaks for coronavirus-hit businesses. The spending plan included cash transfers to low income households, loan guarantees, interest rate sub sidies for small and medium-sized enterprises and capital injections into Indonesia’s sprawling network of state-owned enterprises.
The pandemic has put infrastructure spending on hold and delayed a plan to move the country’s capital to East Kalimantan. Infrastructure spending is likely to make a quick comeback, being one of the government’s priorities for next year — when fiscal stimulus to fight the lingering impact of the pandemic is likely to remain — but the fate of the capital relocation is, like many things this year, uncertain.
There is no way for governments to remove uncertainty. But its impact can be remedied by a finance minister who inspires the sort of confidence that is won only through years of steady, careful economic planning. That description matches Indrawati perfectly.