The Impact of Fiscal Reform on Indonesian Macroeconomy A CGE Framework

Abstract

This paper aims to investigate the impact of exogenous fiscal policies on the
Indonesian main macroeconomic indicators and the implications on different
institutions and sectors in the economy using the static Computable General
Equilibrium (CGE) analysis. Three simulations are conducted in order to
analyze the expansion of exogenous public spending. The results revealed that
the increase of government expenditure on goods under the adjusted government
deficit and balance of payment generates the highest improvement on Indonesian
GDP but resulting an increase in government deficit. In contrast, under
financing scheme of either lowering subsidy rates across activities or increasing
the ad valorem tax rates would result in lower improvement on Indonesian GDP.
This is because it directly escalates the cost of production and thus increases the
prices of final goods purchased by the households which result in a fall in their
real consumption and in turn eventually could lead to a decrease in national
income.