Page 4 - Working Paper (Analysis of Political Budget Cycles in Emerging South East Asian Economies)
P. 4

DDTC Working Paper 0414                                                                                                DDTC Working Paper 0414

                      Democratic  process  in  Thailand  selects    or  higher  the  price  level.  To  lessen  inflationary
                   members that will sit in the House of Representative,   pressure, Central Bank would take precautionary
                   Senate,  local  administrations,  and  the  Governor   measure such as tight monetary policy by
                   of Bangkok.  Thailand has had around 11 general   increasing its short-term interest rates, absorbing
                   elections since 1985;  the last  election  was  in   MO, MI and/or M2 in circulations, and defending
                   2011 where Yingluck Shinawatra was chosen as a   its currency. An increase in interest rate, however,
                   prime minister. Elections in the Philippines were   would result in diminishing private investment.
                   held for a six-year term to choose president, vice-
                   president, and senators. Unlike most of South East    Specific to the case of Indonesia, the country
                   Asian Countries, the president and vice president   has been suffering from a growing current account
                   are directly elected during election days. Theses   deficit, slowing growth, rising inflation and a budget
                   presidential election days have been held from its   deficit since the end of 2012. The budget deficit is
                   independence in 1949. 3                          caused by bloating  fuel subsidy due to increases
                                                                    in imported raw materials and exchange rate
                   3. Fiscal Policy Analysis                        depreciation; and national populist programs (e.g.,
                                                                    National Program for Community Empowerment,
                                                                    School  Operational  Assistance,  Water Supply  and
                      Two  main  fiscal  policies  that  the  government
                                                                    Sanitation  for  Low  Income  Communities,  Rice
                   may use are  direct government expenditures
                                                                    for  Poor,  etc.),  which  could  not  be  fully  financed
                   and  changes in the level  and  composition of tax
                                                                    by steady tax revenue receipt. This problem gets
                   revenue.  The  nature  of  fiscal  policy  depends  on
                                                                    worse as Rupiah depreciates more than 10 percent
                   the state of the economy and also on the tendency
                                                                    during 2013.  Rupiah depreciated by 6 percent in
                   of monetary policy executed by the Central Bank.
                                                                    August 2013 only, making it the worst performing
                   During  economic  boom,  the  government  usually
                                                                    currency in Asia.
                   tries to alleviate the growth by increasing tax rates.
                   This strategy is known as automatic stabilizer or   Slowly the economy now seems to have got out
                   counter-cyclical  policies  to bring the economy   of the worst situation thanks to various measures
                   into its considerable  path.  While, government   taken to shore up  the economy. The government
                   spending;  through  line ministries’  spending,   took  fiscal  policy  package  aimed  at  boosting  its
                   subsidies,  and  other government  development   struggling  economy.  The measure includes new
                   programs; increases well above tax receipt in order   import taxes on some  luxury goods,  a reduction
                   to  foster  socio-economic  development to a much   in oil  imports and the removal  of export  quotas
                   greater  extent than it has  accomplished  to date.   on minerals  and  metal.  The government hopes
                   Conversely  to  the  previous  notion,  economists   to  reduce  current  account  deficit  and  demand  of
                   call  this government action  as pro-cyclical    foreign  currency.  Softening  international  demand
                   policy. Keynesian  stream economics  argues that   for commodities has also caused exports decline in
                   increasing government expenditure with constant   recent times.
                   or decreasing tax  rates will  stimulate aggregate
                   demand. As such, the government usually conducts    Other  possible  fiscal  expansionary  strategies
                   this more prevalent strategy to bring the economy   that a government could take mainly to generate
                   out of recession or want to have faster economic   the economy are, to name a few:
                   growth. 5
                                                                    •  Tax Incentive: 6
                      There is a consequence of exercising loose fiscal     » Tax  Savings  (e.g.  income  tariff  reduction
                   policy,  which  fiscal  economists  refer  to  crowding   and tariff  for  imported  goods;  increase
                   out  effect. In  other words, following  an  increase   tax  allowance, increase tax  holiday and;
                   in government expenditure, aggregate demand/           decrease CIT rate).
                   or income would surge. Hence, this leads to more
                                                                          » Tax  Subsidy  given  to  vegetables  oil  VAT;
                   people want to hold more money to be spent for
                                                                          biofuel VAT; geothermal VAT; imported
                   consumption  leading  to  an  increase  in  inflation
                                                                          duties; and income tax.
                                                                    •  Improvement  of the  effectiveness of tariff
                   3 We exclude Brunei Darussalam into our selected countries because the
                   country runs an absolute monarchy, where the Sultan of Brunei is both   harmonization in  the framework  of regional
                   acting as the head of state and also head of government.
                                                                       and international cooperation.
                   4  Fiscal and Monetary Coordination is commonly executed through Joint
                   Workforce of Ministry of Finance and Central Bank.  •  Extensification  and  intensification  tax  and
                   5 While economic growth has  remained strong, public investment   non-tax revenue by performing the evaluation,
                   in infrastructure  has  not kept pace with  the  rising demand for  urban   improvement of regulations, system, and
                   services. Over the years, much of responsibility of public spending (up to
                   35% of national budget) has shifted into the control of local governments.
                   Yet, many local governments have only limited capacity for responsive
                   and strategic planning, preparation, and execution of public investments   6 Tax incentive package is an integral part of MP3EI, one of Indonesia
                   in order to meet the rising demand for basic services.  National Development Priorities.
   1   2   3   4   5   6   7   8   9