Pengelolaan Keuangan Negara

1. • Theoretical Tools of Public Finance
• Empirical Tools of Public Finance
• Analysis
• Tools of Budget Analysis
DR HASAN RACHMANY, MA 1
1-Apr-24

2. The BASICS OF FISCAL POLICY
 Discretionary fiscal policy: (beside: to produce good &
services, to help achieve an equitable income
distribution ........, to promote full employment, price
stability, and economic growth).
-change of government expenditures, and
-tax collections
 Government uses expansionary fiscal policy: to shift the
aggregate demand curve rightward in order to expand
real output. (this means to increase in government
spending, reduce taxes, or combination).
DR HASAN RACHMANY, MA 2
1-Apr-24

3. The BASICS OF FISCAL POLICY
lanjutan.................
 Government uses contractionary fiscal policy: to
shift the aggregate demand curve leftward in an
effort to halt demand-pull inflation. (This means a
reduction in government spending, tax increases, or
some combination of the two).
 The expansionary effect of fiscal policy is greater
when the budget deficit is financed through money
creation rather than through borrowing; the
contractionary effect of the creation of a budget
surplus is greater when the budget surplus is
retained rather than used for debt reduction.
DR HASAN RACHMANY, MA 3
1-Apr-24

4. The New Classical View
of Fiscal Policy
 The New Classical view stresses that:
 debt financing merely substitutes higher future taxes for
lower current taxes, and thus,
 budget deficits affect the timing of taxes, but not their
magnitude.
 New Classical economists argue that when debt is
substituted for taxes:
 people save the increased income so they will be able to
pay the higher future taxes, thus,
 the budget deficit does not stimulate aggregate demand.
DR HASAN RACHMANY, MA 4
1-Apr-24

5. The New Classical View
of Fiscal Policy
Similarly, New Classical economists
believe that the real interest rate is
unaffected by deficits as people save more
in order to pay the higher future taxes.
Further, they believe fiscal policy is
completely impotent – that it does not
affect output, employment, or real interest
rates.
DR HASAN RACHMANY, MA 5
1-Apr-24

6. What is fiscal policy?
 The budgetary stance of govt
 Using govt expenditure, taxation and govt borrowing to
affect AD, prices and the BoP
 A broader view includes
 social and developmental responsibilities
 Govt’s fiscal policies are outlined in the annual
budget
 Responsibility of the Minister of Finance
 To reveal govt’s priorities
DR HASAN RACHMANY, MA 6
1-Apr-24

7. How Fiscal Policy Influences Aggregate
Demand
 Fiscal policy refers to the government’s choices
regarding the overall level of government
purchases or taxes.
 Fiscal policy influences saving, investment, and
growth in the long-run. In the short-run, fiscal
policy affects the aggregate demand.
DR HASAN RACHMANY, MA 7
1-Apr-24

8. DR HASAN RACHMANY, MA 8
Schematic: Fiscal Policy-Public Expenditure-Growth Linkages
Fiscal Policy
Level of Expenditure
Resource (Pol.choices)
Mobilization
Composition of Expenditure
(Institutional cap)
Growth
Welfare
MDGs Efficiency
Public sector
Outputs
1-Apr-24

9. Principles of government fiscal framework
 Transparency in the setting of fiscal policy
objectives
  Stability in the fiscal policy process and in the
way fiscal policy impacts on the economy;
  Responsibility in the management of the public
finances;
  Efficiency in the design and implementation of
fiscal policy and in managing both sides of the
public sector balance sheet; and
  Fairness, including between generations.
DR HASAN RACHMANY, MA 9
1-Apr-24

10. Fiscal rules (Best Practice)
 Golden rule:
 over the economic cycle, the
Government will borrow only to invest
and not to fund current spending
 Sustainable investment rule:
 public sector net debt as a % of GDP
will be held over the economic cycle at
a stable and prudent level (<60%GDP)
DR HASAN RACHMANY, MA 10
1-Apr-24

11. Functions of Fiscal policy
 3 broad functions:
 Provide public goods and services
 Allocative function
 Help achieve an equitable income distribution
 Distribution function
 Promote economic growth and employment
 Stabilisation function
DR HASAN RACHMANY, MA 11
1-Apr-24

12. Instruments of Fiscal policy
 The basic instruments therefore are:
 Govt expenditure
 Current vs capital expenditure
 Direct and indirect taxes
 E.g. personal income tax, corporate tax vs. VAT
 Govt borrowing (and public debt management)
 Domestic vs foreign
DR HASAN RACHMANY, MA 12
1-Apr-24

13. Budget Deficits
 Conventional Deficit
• Total govt exp > total govt revenue for a given year
 Primary Deficit
• Conventional deficit – interest payments
 Public Debt
• Sum of all govt liabilities. Sum of all conventional
deficits plus other liabilities
 Debt-to-GDP ratio
• Total govt debt/GDP
• An estimate of ‘solvency’
DR HASAN RACHMANY, MA 13
1-Apr-24

14. Are deficits good or bad for
economic growth?
 ed govt spending AD
 However, deficits still need to be repaid!
 Different economic paradigms consider different
impact
 Neoclassical paradigm
 G AD thus increasing the deficit
 As national saving is lower, Md r
 rI (“crowding out” of private investment)
DR HASAN RACHMANY, MA 14
1-Apr-24

15. • Rapid growth in size over the past 50 years
• Two reasons:
a. Desire to increase rate of growth and industrialization
- growth in state owned enterprises.
- this trend is reversing
b. Growth in social program
- social security
- health expenditure
- unemployment insurance
- welfare programs
• Need to think how these objectives and programs can be
more effectively delivered. E.g. public-private partnerships.
What is the Appropriate Size of the Public
Sector?
DR HASAN RACHMANY, MA 15
1-Apr-24

16.  Keynesian Paradigm
 Supports budget deficit to stabilise and stimulate
economy
 ADboosts output and employment
 Crowding out is insufficient to reduce output
 Public investment is complementary to private
investment
DR HASAN RACHMANY, MA 16
1-Apr-24

17. Ricardian Equivalence Paradigm
David Ricardo’s theory of tax
Has a neutral approach to fiscal deficits
If government cuts tax (fiscal deficit)
=>financed by bonds
Rational individual realize that tax will
 in future
Therefore put additional wealth into
savings
DR HASAN RACHMANY, MA 17
1-Apr-24

18.  ed saving relieves pressure on r thus
reducing crowding out
 ed saving can also be used to pay govt debt
in future
 The ‘Fourth’ Paradigm
 Evidence is not consistent with other 3
approaches
 The effect of deficits depends on
 How it’s financed, its size and current
GDP rate
DR HASAN RACHMANY, MA 18
1-Apr-24

19. Changes in Government Purchases
 The central government can influence the economy
because
 of the size of the central government in relation to the
economy and other economic entities.
 of the deliberate use of spending and taxes to
manipulate the economy toward achieving a
predetermined outcome.
DR HASAN RACHMANY, MA 19
1-Apr-24

20. Changes in Government Purchases
 The central government’s control of the
economy is both direct and indirect.
 Its expenditures have a direct effect on
aggregate spending and therefore
equilibrium GDP.
 Taxes and tax policy indirectly affect the
aggregate spending of consumers.
DR HASAN RACHMANY, MA 20
1-Apr-24

21. Changes in Government Purchases
There are two macroeconomic effects
from government purchases:
 The Multiplier Effect
 The Crowding-Out Effect
DR HASAN RACHMANY, MA 21
1-Apr-24

22. The Multiplier Effect of
Government Purchases
 The formula for the multiplier is:
Multiplier = 1 ÷ (1 - MPC)
 the MPC is the Marginal Propensity to Consume.
DR HASAN RACHMANY, MA 22
1-Apr-24

23. The Crowding-Out Effect
 An increase in government purchases causes the
interest rate to rise, and a higher interest rate tends to
choke off the demand for goods and services.
 The reduction in demand that results when a fiscal
expansion raises the interest rate is called the
crowding-out effect.
DR HASAN RACHMANY, MA 23
1-Apr-24

24. Changes in Taxes
 When the government cuts taxes, it:
 Increases households’ take-home pay, which ...
… results in households saving some of the additional
income, but
… households will spend some on consumer goods, thus
… shifting the aggregate-demand curve to the right.
DR HASAN RACHMANY, MA 24
1-Apr-24

25. Changes in Taxes
 The size of the shift in aggregate demand resulting
from a tax change is also affected by the multiplier and
crowding-out effects.
 The duration of the shift in the aggregate demand is
also determined by the B of C’s policy for the exchange
rate (fixed or varied).
DR HASAN RACHMANY, MA 25
1-Apr-24

26. Lags in Fiscal Policy
 The time required approving and
implementing fiscal legislation may hamper
its effectiveness and weaken discretionary
fiscal policy and may in fact do more harm
than good
 Since a recession is not usually identified as
such until at least six months after it begins,
and since the eight recessions since 1949
lasted an average of 11 months, this leaves a
narrow window in which to execute
discretionary fiscal policy
DR HASAN RACHMANY, MA 26
1-Apr-24

27. Principles of Central Bank monetary policy
framework
 Clear and precise objectives (proper target of annual
rise in CPI inflation)
  Full operational independence for the Bank of
Indonesia Monetary Policy.
 Openness, transparency and accountability
  Credibility and flexibility
DR HASAN RACHMANY, MA 27
1-Apr-24

28. Keynesian Policy
to Combat Recession
 When an economy is operating below its potential
output, the Keynesian model suggests that the
government should institute expansionary fiscal
policy, by:
 increasing the government’s purchases
of goods & services, and/or,
 cutting taxes.
DR HASAN RACHMANY, MA 28
1-Apr-24

29. Keynesian Policy
To Combat Inflation
 When inflation is a potential problem,
Keynesian analysis suggests a shift toward a
more restrictive fiscal policy by:
 reducing government spending, and/or,
 raising taxes.
DR HASAN RACHMANY, MA 29
1-Apr-24

30. Tax Assignment Principles
 Efficiency of internal common market
 National equity
 Efficiency in tax administration
 Fiscal Need
DR HASAN RACHMANY, MA 30
1-Apr-24

31. 31
What is decentralization?
 Transfer of authority from central to local
 Encompasses a variety of concepts which must be
carefully analyzed in any particular country before
application.
 Each country has its own “rhythm” of change
 This analysis should include the various types of
decentralization
1-Apr-24
DR HASAN RACHMANY, MA

32. 32
What types of decentralization?
Or
In what ways does
decentralization occur?
?
1-Apr-24
DR HASAN RACHMANY, MA

33. 33
Types of Decentralization
 Political:
Aims to give citizens or their elected representatives
more power in public decision-making. Advocates
assume that decisions made with greater participation
will be better informed and more relevant to diverse
interests in society than those made only by national
political authorities.
1-Apr-24
DR HASAN RACHMANY, MA

34. 34
Types continued..
 Administrative Decentralization –
Seeks to redistribute authority and financial
resources among different levels of government. The
3 forms are: Deconcentration, Delegation, and
Devolution
1-Apr-24
DR HASAN RACHMANY, MA

35. 35
Types continued..
 Fiscal Decentralization –
Giving local governments and private organizations
revenues to carry out service effectively. Forms
include: a) self-financing; b) expansion of local
revenues; c) intergovernmental transfers; d)
authorization of municipal borrowing
1-Apr-24
DR HASAN RACHMANY, MA

36. 36
Types continued..
 Privatization –
Government and private sector cooperate to provide
services or infrastructure
 Deregulation –
Reduces legal constraints on private participation or
allows competition among private suppliers for
services that in the past were provided by the
government or regulated monopolies
1-Apr-24
DR HASAN RACHMANY, MA

37. 37
What are some drawbacks or
potential dangers of
decentralization?
?
1-Apr-24
DR HASAN RACHMANY, MA

38. 38
Argument against decentralization
 Makes stabilization policies more difficult to
implement, or even destabilization of public
expenditures and debt
 Offloading of fiscal imbalances by central
governments to local governments. Strong association
between decentralization and fiscal imbalances at
lower levels
 Possibility that decentralization retards economic
growth
1-Apr-24
DR HASAN RACHMANY, MA

39. 39
Argument for decentralization
 Efficiency:
Decisions about public expenditure on a closer level
of government are more responsive and reflect local
demand more so than remote gov’t. Also,
improvement of competitiveness of gov’t and
enhances innovation – more likely to act to satisfy
the wishes of citizens.
1-Apr-24
DR HASAN RACHMANY, MA

40. 40
Argument for decentralization
 Political –
Decentralization an essential part of
democratization as autocratic central regimes are
replaced by elected governments
1-Apr-24
DR HASAN RACHMANY, MA

41. INDONESIA
A Stronger Unitary State
 Democracy
 Decentralization
 Governance
Federal State
 Democracy
 Decentralization
 Governance
DR HASAN RACHMANY, MA 41
after 2040
?
1-Apr-24

42.  Unitary State  Federal State
DR HASAN RACHMANY, MA 42
Local
Provincial
Central
Federal
State
Local
 Federal (USA Type)
Federal
Local
State
1-Apr-24