Indonesian government’s primary balance and debt

Abstract

This study aims to determine the Indonesian fiscal sustainability condition by analyzing the impact of government debt on primary balance for the 1980-2018 period. Accordingly, we analyze the research data by using the Autoregressive Distributed Lag (ARDL) method. The results show that government debt has a significant and positive effect on primary balance, likely because the government intends to stimulate the economy and boost tax revenues by keeping debt interest rates low. Therefore, based on Bohn’s condition, Indonesia exhibits sustainable fiscal policies. However, in the short run, government debt negatively affects primary balance due to several factors, such as suboptimal tax efforts and revenue growth, unproductive use of debts, and relatively low capital expenditures. In sum, our research results recommend that the Indonesian government considers various policies that likely offset increased debts, such as intensifying and extending tax efforts to increase tax revenues and increase government spending in various productive sectors.