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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

Economic , fiscal , 

and Financial 

Research

Research Paper

Policy Note

Budget 

Allocation 

State Budget 

Law

Budget 

execution

Budget Execution 

Document

And Financial 

Report

Macroeconomic and 

Fiscal Policy 

Framework 

‐Macroeconomic 

assumptions

‐Financial Note

Process

(4)

Fiscal 

Sustainability

Budget 

Constraint

Sustainable 

Development

People 

Prosperity

Fiscal 

Policy

Government Budget

Pro‐

Growth

Allocation

Distribution

Stabilization

Pro‐

Job

Pro‐

Environtm

ent

Pro‐

Poor

(5)

Models in Fiscal Policy Agency

Model

Description

Output

Macroeconomic Assumption 

Projection

To measure/forecast 

macroeconomic variables

‐ Growth

‐ Inflation

‐ Oil Price

Taxation Model

To forecast / determine tax 

revenue target 

‐ Income tax revenue

‐ Value Added Tax revenue

‐ Other Tax Revenue

‐ Excise Tax revenue

State Expenditure Model

to 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

MODFI

Macro‐micro simultaneous 

model

‐ Impact of macreconomic variables 

changes on state budget 

‐ Impact of state budget on 

macreconomic varibales

(6)
(7)

Tax Realization 

Projection

Tax Revenue 

Projection in 

Budget 

Tax Gap

Tax 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

(8)

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 

S

A

K

E

R

N

A

S

Household 

Characteristics

Taxable income 

distribution

Formal Sector 

Employment

I‐O Table

% personal  income

(PI)

% Corporate profit

(9)

VAT POTENCY MODEL

VAT POTENCY

VAT Taxbase per Sektor

Konsumsi dan Impor kena PPN

GDP per Sector

Consumption and Import values

TAX COVERAGE

Consumption and Import

values (per sector) from GDP

I-O TABLE

% Consumption per sector

VAT Realization per

Sector

(10)

Budget

State 

Expenditure

Transfer to 

Region

Allocation in 

the Economy

I‐O MOdel

Budget 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

(11)

Money Supply Money Demand

Interest Rate Investment

Demand : - Total Consumption - Total Investment - Net Export Supply: - Capacity of Production Price Utilization Wage Cost of Production Profit Fiscal Deficit

Structure of MODFI

(12)

DATA, VARIABLES, AND

MEASUREMENT

(13)

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 Price

Volatile 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 Model

to determine inflation rate 

assumption in state budget 

BPS 

Time series 

quarterly

(14)

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

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

Tax Revenue Target Model

Tax Revenue Monthly Monitoring

Potential Tax Revenue Model

TAXATION MODEL

(15)

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

(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).

(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

(19)

MODFI MODEL

Aims:

(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

(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?

(22)

References

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