FISCAL POLICY AGENCY MINISTRY OF FINANCE MACROECONOMIC MODELLING IN FISCAL POLICY AGENCY

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1 FISCAL POLICY AGENCY MINISTRY OF FINANCE MACROECONOMIC MODELLING IN FISCAL POLICY AGENCY Ardi Sugiyarto Ginanjar Wibowo ESCAP, 8-11 Desember 2015

2 FISCAL POLICY FORMULATION IN INDONESIA

3 Fiscal Policy and Budget Process Fiscal Policy Formulation Budget Planning Budget Execution Economic, fiscal, and Financial Research Macroeconomic and Fiscal Policy Framework Budget Allocation Budget execution Research Paper Policy Note Macroeconomic assumptions Financial Note State Budget Law Budget Execution Document And Financial Report Process FISCAL POLICY AGENCY DG BUDGET & PARLAIMENT LINE MISNISTRY

4 HOW TO DESIGN FISCAL POLICY Fiscal Sustainability Pro Job Budget Constraint Pro Growth Government Budget Pro Environtm ent Pro Poor Distribution Fiscal Policy Allocation Stabilization People Prosperity Sustainable Development

5 Models in Fiscal Policy Agency Model Description Output Macroeconomic Assumption Projection Taxation Model State Expenditure Model State Budget Senstivity Model MODFI To measure/forecast macroeconomic variables To forecast / determine tax revenue target to measure impact of state expenditure on the economy to simulate the effect of macroeconomic variables changes on state budget Macro micro simultaneous model Growth Inflation Oil Price Income tax revenue Value Added Tax revenue Other Tax Revenue Excise Tax revenue Impact of expenditure on: output, employment, and poverty State budget baseline Policy measure Impact of macreconomic variables changes on state budget Impact of state budget on macreconomic varibales 5

6 THE FRAMEWORK OF THE MODELS 6

7 TAXATION MODEL Tax Revenue Monthly Monitoring Tax Revenue Target Model Potential Tax Revenue Model Policy Impact Model Tax Gap Tax Policy Impact Tax Realization Projection Baseline Extra Effort Policy Tax Revenue Projection in Budget Booming Sector Sectoral Model Leading Sector 7

8 INCOME TAX POTENCY MODEL GDP per Sector I O Table % personal income (PI) % Corporate profit Corporate Profit (% of GDP) PI (% of GDP) Corporate income tax base Corporate income tax potency Taxable personal income Taxable income ( tax base) Tariff Formal Sector Employment Household Characteristics Taxable income distribution S A K E R N A S INCOME TAX POTENCY Personal income tax potency *SAKERNAS : The National Labor Force Survey 8

9 VAT POTENCY MODEL I-O TABLE % Consumption per sector GDP per Sector Consumption and Import values Consumption and Import values (per sector) from GDP VAT Taxbase per Sektor Konsumsi dan Impor kena PPN 10% VAT Tariff VAT POTENCY VAT Realization per Sector TAX COVERAGE RATIO 9

10 STATE EXPENDITURE MODEL State Expenditure Budget Transfer to Region Allocation in the Economy Impact Subsidy and Capital Expenditure Personnel and Material Expenditure Supply SIde Demand Side Output Budget Conversion in the Economic Sectors I O MOdel Multiplier Income Labour Poverty Econometric Model 10

11 Structure of MODFI Money Supply Money Demand Interest Rate Investment Fiscal Deficit Demand : - Total Consumption - Total Investment - Net Export Supply: - Capacity of Production Price Utilization Cost of Production Wage Profit Import Price Productivity 11

12 DATA, VARIABLES, AND MEASUREMENT 12

13 Macroeconomic Assumptions Projection Model Description Variables Data Software Growth Projection Model to forecast economic growth by using econometric model Major Trading Partner (MTP) Growth CEIC Eviews to estimate coefficient Indonesia Crude Oil Price (ICP). Consumer Price Index (CPI) Bank Credit Time series quarterly Spreadsheet/Excel to forecast/simulate growth projection based on several scenarios of econometric models Eviews to estimate Core Inflation to determine inflation rate coefficient(contribution) of each inflation Inflation Model BPS assumption in state budget Administered Price Excel to estimate change of inflation Volatile Price contribution of increase of particular Oil Price ARIMA model ICP CEIC Eviews 13

14 TAXATION MODEL Model Description Variables Data Software Tax Revenue Monthly Monitoring Tax Revenue Target Model Potential Tax Revenue Model 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 Eviews Excahange Rate Ministry of Trade Effective Tariff estimated by ARIMA Gross National Income CPO estimate by ARIMA Consumption Elasticity Efective tariff Dutiable import Export Volume CPO To forecast potential tax revenue to measure tax gap GDP BPS EXcel I O table Household Income Survey Corporate Profit 14

15 MODFI Model Real sector Block Government Block Monetary Block 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 Employment equations: 2.3. Fiscal Deficit equation. - Demand for employees equation; - Wages equations; - Cost production equation. 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 expenditures 2. Macroeconomic data national account, BOP, monetary, employment and wages 15

16 APPLICATION OF MODELS 16

17 TAXATION MODEL Aims: 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. 17

18 STATE EXPENDITURE MODEL Aims: 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 18

19 MODFI MODEL Aims: to analyze the impact of macroeconomic changes on state budget, and reversely 19

20 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 20

21 FUTURE DEVELOPMENT Needs for better model 1. 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? 21

22 THANK YOU 22

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