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The Distributional Impact of Fiscal Policy in Indonesia
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The Distributional Impact of Fiscal Policy in Indonesia

Author

Listed:
  • Jon Jellema

    (CEQ Institute)

  • Matthew Wai-Poi

    (World Bank)

  • Rythia Afkar

    (World Bank)

Abstract

In recent years, income inequality has become a pressing issue in Indonesian politics. From 2000-2014, a rise in GDP per capita coincided with a 10% rise in the country’s Gini coefficient. This paper uses the 2012 National Socioeconomic Survey (SUSENAS) collected by the Central Statistical Agency in Indonesia and 2012 public expenditure and revenue data from the Audit Board of the Republic of Indonesia (BPK), to generate an empirical framework that assesses the redistributive impact of several fiscal measures undertaken by the Indonesian government. This paper finds that every income decile represented in SUSENAS is a net receiver from fiscal policy after taxes, transfers, in-kind transfers and subsidies are all added to “market income” to create “final income.” Gains amongst the poorest household are made much greater by the inclusion of in-kind transfers for health and education. However, SUSENAS included very few of the richest 0.5% of Indonesians, who account for the majority of personal income tax (PIT) collections, so it was assumed that Indonesians do not pay income tax. Interestingly, this study finds that 40% of the poor, measured at “consumable income,” are impoverished by taxes and transfers. This percentage drops considerably with the addition of in-kind transfers. Overall, it was found that fiscal policy does reduce inequality and poverty by a modest amount. The Gini index is lowered from 0.394 to 0.370 under the study’sbaseline scenario, which differs only slightly from scenarios utilizing different underlying assumptions. The poverty headcount (measured at $1.25 UDS per day) is reduced from 12.1% to 10.5%.

Suggested Citation

  • Jon Jellema & Matthew Wai-Poi & Rythia Afkar, 2017. "The Distributional Impact of Fiscal Policy in Indonesia," Commitment to Equity (CEQ) Working Paper Series 40, Tulane University, Department of Economics.
    • Handle: RePEc:tul:ceqwps:40
    as

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    File URL: http://repec.tulane.edu/RePEc/ceq/ceq40.pdf
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    References listed on IDEAS

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    Cited by:

    1. Christine Lewis, 2019. "Raising more public revenue in Indonesia in a growth - and equity-friendly way," OECD Economics Department Working Papers 1534, OECD Publishing.
    2. Nora Lustig, 2018. "Measuring the Distribution of Household Income, Consumption and Wealth: State of Play and Measurement Challenges," Working Papers 1801, Tulane University, Department of Economics.
    3. World Bank, 2018. "Indonesia Economic Quarterly, March 2018," World Bank Publications - Reports 29616, The World Bank Group.

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    More about this item

    Keywords

    fiscal incidence; taxation; social spending; inequality; poverty; Indonesia;
    All these keywords.

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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