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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
5
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