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

DDTC Working Paper 0414 DDTC Working Paper 0414
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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
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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.