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E D I S I 0 2 T A H U N X V I I 2 0 1 1 four criteria: 1 timing; 2 target; 3 implementation; and 4
multiplier effect. This study is divided systematically as follows: The first part
describes the background of this study. The second discusses the theoretical debates associated to the fiscal stimulus policy.
The third section explains briefly about the fiscal policy package issued by the government. The fourth section describes the
evalution of the fiscal stimulus using the four criteria. The last section outlines conclusions from this study.
II. LITERATURE REVIEW
The world seemed turning to the left as the role of the government in the economy has gotten higher. Even
governments around the world today agreed to issue a fiscal policy package as the countercyclical action to raise the
economy from the downfall, the debate related to the role of government and its effectiveness has not yet been finished.
There are still pros and cons with the fiscal stimulus. From the pros side, if we consider the recent global financial crisis
with the collapse of financial markets, declining world trades and production capacities, it is difficult for a country to expect
stable contribution of economic activities from investment and export. In this case, the role of government through fiscal policy
appears as the reliable choice. The choice of fiscal stimulus is also considering the narrowness of the monetary policy space
in addressing the collapsed financial markets. Even so, in order to make fiscal stimulus work well, it should be “Timely,
Temporary, and Targeted” Furman, 2008. In this regard, fiscal stimulus must be precisely in time, target, and as well as
temporary.
Meanwhile, from the cons side, there are other arguments related to the Ricardian Equivalence theory and the fear of a
crowding out effect. More specifically, Feldstein 2009 said that one of the reasons of fiscal stimulus ineffectiveness is the
time lag between the decision to conduct and its realization. Time factor as required previously is difficult to meet. As a
result, the fiscal stimulus can lose the momentum. It influences the economy after the peak of the recession. The bad effect is
causing additional unintended demands in the economy which has already begun to grow.
Regardless of the existing pros and cons, previous research show that the effectiveness of fiscal stimulus may vary depending on
many factors. Fiscal stimulus policy is successful in one country, but not necessarily produces similar results in other countries.
It was showed by Ilzetzki, Mendoza, and Vegh 2009 in their research. First, in developing countries, the impact of the
increasing of government spending to boost output is lower and not durable compared to developed countries. Second, the level
of exchange rate flexibility is a determined variable for fiscal policy multiplier effect. Countries with a flexible exchange rate
regime have lower multiplier effect rather than countries with fixed exchange rate regime. Third, the level of openness of the
country measured by exports plus imports in proportion to GDP is also a critical variable. The more open the economy,
the lower effectiveness of fiscal policy. Last, other factor that influences the effectiveness of fiscal policy is the level of the
country’s debt. In countries with high debt ratios, an increase in output driven by fiscal stimulus tends to less effective compared
to countries with low debt ratios.
In addition, Tang, Liu and Cheung 2010 investigated the effectiveness of fiscal policy in five countries of Association
of Southeast Asian Nations ASEAN: Indonesia, Malaysia, Philippines, Singapore and Thailand. By using a structural
vector autoregression VAR model, government spending is found to have weak and largely insignificant impact on output,
while taxes are found to have outcomes contrary to conventional theory. Extended study using a time-varying VAR model
reveals the impact of taxes on output mainly reflect heightened concerns over public finances amid the Asian financial crisis
and the recent global financial crisis.
III. FISCAL STIMULUS PACKAGE
Facing the threat of global financial crisis, Government of Indonesia launched IDR 73.3 trillion of fiscal stimulus package.
The package has three goals: 1 to preserve and improve people’s purchasing power to maintain household consumption
growth above 4 per cent; 2 to preserve firm competitiveness facing the global crisis; and 3 to improve the employment
absorbtion and cope with firm layoffs through infrastructure projects. Details on the fiscal stimulus package can be seen in
table 3.1, with around 70 per cent of the package IDR 56.3 trillion take in form of tax incentive tax cut.
In order to achieve the first goal, the government used personal income tax rate cut, which resulted tax saving up to IDR 24.5
trillion. These tax saving policies consisted of two aspects, i.e. the reduction of tax rate for each group of household income
and the increasing of level of income that is not accounted in the tax Pendapatan Tidak Kena Pajak or PTKP. Each of those
aspects contributed to as much as IDR 13.2 trillion and IDR 15.8 trillion additional savings respectively. The other policies
used by government were the subsidy for three commodities, namely cooking oil, bio-fuels and selected medicinesFor the
second goal, the government reduce the corporate income tax rate, from 30 per cent to 28 per cent. This policy resulted tax
saving up to IDR 18 trillion. The government also gave subsidy for business sectorfirm in form of the reduction of gasoline
solar price and discounted peak load electricity tariff.
Infrastructure projects were the primary tools in order to achieve the third goal. Government of Indonesia allocated IDR
11.93 trillion for infrastructure construction, concentrated on nine types of infrastructures, namely: 1
public works infrastructure; 2 transportation infrastructure; 3 energy
infrastructure; 4 public housing infrastructure; 5 special housing infrastructure; 6 road and irrigation infrastructure;
7 market infrastructure; 8 employment training; and 9 Health infrastructure. Moreover, the government also allocated
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E D I S I 0 2 T A H U N X V I I 2 0 1 1 IDR 721.5 billion for two program, i.e. revitalization and
rehabilitation of primary warehouse in the food production centers and national programs of community empowerment
Program Nasional Pemberdayaan Masyarakat or PNPM.
Table 3.1: Fiscal Stimulus Package
Source: 2009 Fiscal Stimulus Document, Ministry of Finance
IV. FISCAL STIMULUS EVALUATION
