FISCAL POLICY AGENCY MINISTRY OF FINANCE

MACROECONOMIC MODELLINGIN FISCAL POLICY AGENCY

Ardi SugiyartoGinanjar WibowoESCAP, 8-11 Desember 2015

FISCAL POLICY FORMULATIONIN INDONESIA

Fiscal Policy and Budget Process

Economic , fiscal , and Financial Research

Research PaperPolicy Note

Budget Allocation 

State Budget Law

Budget execution

Budget Execution Document

And Financial Report

Macroeconomic and Fiscal Policy Framework 

‐Macroeconomic assumptions

‐Financial Note

Process

Fiscal Policy Formulation Budget Planning Budget Execution

FISCAL POLICY AGENCYDG BUDGET

& PARLAIMENTLINE MISNISTRY

Fiscal Sustainability

Budget Constraint

Sustainable Development

People Prosperity

Fiscal Policy

Government BudgetPro‐Growth

Allocation

Distribution Stabilization

Pro‐Job

Pro‐Environtm

ent

Pro‐Poor

HOW TO DESIGN FISCAL POLICY

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Models in Fiscal Policy Agency

Model Description Output

Macroeconomic Assumption Projection

To measure/forecast macroeconomic variables

‐ Growth‐ Inflation‐ Oil Price

Taxation ModelTo forecast / determine tax revenue target 

‐ Income tax revenue‐ Value Added Tax revenue‐ Other Tax Revenue‐ Excise Tax revenue

State Expenditure Modelto measure impact of state expenditure on the economy

‐ Impact of expenditure on:‐ output, employment, and poverty

State Budget Senstivity Model

to simulate the effect of macroeconomic variables changes on state budget

‐ State budget baseline‐ Policy measure

MODFIMacro‐micro simultaneous model

‐ Impact of macreconomic variables changes on state budget ‐ Impact of state budget on macreconomic varibales

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THE FRAMEWORK OF THE MODELS

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Tax Realization Projection

Tax Revenue Projection in 

Budget 

Tax GapTax Policy Impact

Baseline

Tax Revenue Monthly 

Monitoring

Tax Revenue Target Model

Policy Impact Model

Potential Tax Revenue Model

Sectoral Model

Booming Sector

Leading Sector

Extra Effort Policy

TAXATION MODEL

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INCOME TAX POTENCY MODEL

Taxable personal income

Taxable income( tax base)

Personal income tax potency

INCOME TAX POTENCY

GDP per Sector

PI (% of GDP)

Corporate income tax base

Corporate income tax potency

Corporate Profit (% of GDP)

Tariff 

SAKERNAS

Household Characteristics

Taxable income distribution

Formal Sector Employment

I‐O Table% personal  income (PI)% Corporate profit

*SAKERNAS : The National Labor Force Survey

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VAT POTENCY MODEL

VAT POTENCY

VAT Taxbase per SektorKonsumsi dan Impor kena PPN

GDP per SectorConsumption and Import values

TAX COVERAGE RATIO

Consumption and Import values (per sector) from GDP

I-O TABLE% Consumption per sector

VAT Realization per Sector

10% VAT Tariff

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Budget

State Expenditure

Transfer to Region

Allocation in the Economy

I‐O MOdelBudget Conversion in Budget Conversion in 

the Economic Sectors

Impact

Subsidy and Capital Expenditure

Personnel and Material 

Expenditure

Multiplier

Output

Income

Labour

Poverty Econometric Model

Supply SIde Demand Side

STATE EXPENDITURE MODEL

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Money Supply Money Demand

Interest Rate Investment

Demand :- Total Consumption- Total Investment- Net Export

Supply:- Capacity of Production

Price Utilization

WageCost ofProduction

Import Price Productivity

Profit

Fiscal Deficit

Structure of MODFI

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DATA, VARIABLES, AND MEASUREMENT

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Macroeconomic Assumptions Projection

Model Description Variables Data  Software

‐ Major Trading Partner (MTP) Growth CEIC Eviews to estimate coefficient

‐ Indonesia Crude Oil Price (ICP).

‐ Consumer Price Index (CPI)‐ Bank Credit

Core  Inflation Eviews to estimate coefficient(contribution) of each inflation

Administered PriceVolatile Price

Oil Price ARIMA model ICP CEIC Eviews

Excel to estimate change of inflation contribution of increase of particular 

Spreadsheet/Excel to forecast/simulate growth projection based on several scenarios of econometric models

Growth Projection Model

to forecast economic growth by using econometric model 

Inflation Modelto determine inflation rate assumption in state budget 

BPS 

Time series quarterly

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Model Description Variables Data Software

Monthly Monitoring of Tax Revenue Realization Tax revenue monthly realization

DG Treasury MOF Excel

To forecast annual tax revenue realization To forecast tax revenue (Non Oil Tax Revenue, Excise, duty) per item annually by using time series data 

Economic Growth MOF Excel

Inflation BPS EviewsExcahange Rate Ministry of Trade

Effective Tariff estimated by ARIMA Gross National IncomeCPO estimate by ARIMA Consumption

ElasticityEfective tariffDutiable importExport VolumeCPO

To forecast potential tax revenue to measure tax gap  GDP BPS EXcelI‐O tableHousehold Income SurveyCorporate Profit

Tax Revenue Target Model

Tax Revenue Monthly Monitoring

Potential Tax Revenue Model

TAXATION MODEL

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1.1. Supply of goods & services: 2.1. Government Revenue: 3.1. Interest Rate equation;- Production capacity equation; - Direct taxes equation; 3.2. Money supply equation;- Utilization rate equation. - Income tax non-oil & gas equations; 3.3. Money demand equations;

- Oil & gas revenue equations; 3.4. Balance of Payment Equations:1.2. Demand for goods & services: - Indirect taxes equations; - Private investment credit equation;- Private consumption equation; - Non-tax revenue equations; - Net indirect investment equation;- Government consumption equation; - Total government revenue equation. - Net private capital inflow equation;- Private investment equation; - Current Account equation;- Government investment equation; 2.2. Government Expenditure: - Net other items equation.- Export equations; - Government expenditure for wages equations;- Import equations. - Government expenditure for material equations;

- Oil subsidy equations;1.3. Price equations: - Interest payment equations;- Consumption goods price equations; - Amortization of foreign & domestic debt equations;- Investment goods price equations; - Balance Fund equations;- Government goods price equations; - Fiscal deficit equation;- Export non-oil & gas price equation. - Development expenditure equations.

1.4. Employment equations: 2.3. Fiscal Deficit equation.- Demand for employees equation;- Wages equations;- Cost production equation.

Real sector Block Government Block Monetary Block

MODFI Model

• Coefficient in every equation come from econometrics estimation by using Eviews software• MODFI use Spreadsheet to simulate the shocks and provide model output• Data sets since 1970 :

1. fiscal data government revenues and expenditures2. Macroeconomic data national account, BOP, monetary, employment and wages

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APPLICATION OF MODELS

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TAXATION MODELAims:• To measure the potency of taxes (income tax and VAT) based on the characteristic of real sectors

(agriculture, mining, industry, etc).• To show which sectors that are considered as leading sectors and/or undertax sectors.

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STATE EXPENDITURE MODELAims:• To measure the impact of state budget expenditure on the economy• To simulate the impact of reallocation of expenditure on the economy and changes of sectoral

contribution in the economy

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MODFI MODELAims: • to analyze the impact of macroeconomic changes on state budget, and reversely

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CHALLENGES FOR POLICYMAKER

• Partial economic modelling cannot explain the policy impact comprehensively. It is not easy to capture various factors in the economy

• Difficulties in forecasting the medium term fiscal framework The models are often developed in the perseptive of 1 fiscal year

• Difficulties in making the model inline with the budget The budget is the result of discussion between GoI and the

Parliament. Adding factors in relevan cells must be one by one time

consuming

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FUTURE DEVELOPMENT

Needs for better model1. Comprehensive:

- To capture all main macroeconomic variables behavior- To accommodate specific policy

2. Flexible and User Friendly:- Easy to use (sophisticated but not complicated)- Can be used to simulate all shock in the economy

3. Ability to measure the progress of policy goal achievement

Next big steps:1. How to syncronizing the national goal with SDG’s?2. How to accurately measure in achieving SDG’s?3. How to forecast budget in the medium term framework?4. How to capture international transmission in the model?

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THANK YOU