One of the most important instruments used by the government to manage a country’s economy is fiscal policy. This concept is closely related to the way the government manages its revenues, expenditures, and tax arrangements.
In fact, fiscal policy is a series of actions taken by the government to control state revenues and expenditures, as well as their influence on economic activity.
This includes tax policies, budget allocations, and government spending aimed at achieving certain economic goals.
So, to better understand what fiscal policy is, its legal basis, objectives, types, instruments, examples, differences with monetary policy, and how it relates to crypto taxes, see the full review below.
What is fiscal policy?
Fiscal policy is an economic management concept first introduced by John Maynard Keynes. This concept has been a common basis in global economic governance since World War I in 1929, known as the Great Depression.
According to Keynes, the government of a country has the right and responsibility to regulate the flow of state income and expenditure by establishing tax policies and relevant macroeconomic measures.
By definition, fiscal policy is a series of actions taken by the government to maintain the stability of state revenues and expenditures, with the aim of encouraging healthy economic growth.
In a more specific context, fiscal policy includes aspects such as tax regulations, government revenues, debt management, and the allocation of government spending to achieve certain economic goals.
In Indonesia, the implementation of fiscal policy has existed since the Dutch colonial period, starting with the Indische Comptabiliteitswet (ICW) in 1944.
This law was then adopted by the Indonesian government to formulate fiscal policy from the time of the Proclamation of Independence until 1997–2003.
However, from 2003 until now, fiscal policy in Indonesia no longer refers to the 1944 ICW but is based more on an analysis of the country’s economic conditions in accordance with the provisions of the 1945 Constitution.
The party that has the authority to formulate fiscal policy in Indonesia is the Ministry of Finance of the Republic of Indonesia, working together with the President.
Fiscal policy is very important in managing the economy because it has a significant impact on social welfare, economic growth, and macroeconomic stability.
One of them is that fiscal policy allows the government to control aggregate demand in the economy.
By setting the level of taxation, the level of government spending, and the level of public spending, the government can influence the level of aggregate demand (consumption, investment, and government spending) in the economy.
This helps in avoiding extreme economic fluctuations, such as recessions or excessive inflation.
Get to know the legal basis for fiscal policy
Provisions regarding fiscal policy are written in Law Number 17 of 2003 concerning State Finance. The law explains that fiscal policy related to the state budget (APBN) has several key functions.
These include authorization, planning, supervision, allocation, distribution, and stabilization. The authorization function refers to the use of the state budget as a basis for carrying out revenues and expenditures for the year in question.
This statement is in accordance with the provisions of the 1945 Constitution, article 23 paragraph (1), which confirms that “the State Revenue and Expenditure Budget is determined every year”.
In terms of the planning function, the state budget is used as a guide for management in planning activities for the year.
Furthermore, the supervisory function in the context of fiscal policy indicates that the state budget functions as a guide to assess whether the implementation of government activities is in accordance with established provisions or not.
Fiscal Policy Objectives
Recognizing the objectives of fiscal policy is very important because fiscal policy is one of the main instruments used by the government to manage a country’s economy.
By understanding its objectives, the government can plan and implement effective fiscal policies to achieve economic stability, growth, and the overall welfare of society. The following are several fiscal policy objectives, including:
1. Increasing the Nation’s Economic Growth
The main goal of fiscal policy is to maintain the country’s economic stability. However, his role doesn’t stop there; fiscal policy also plays a key role in stimulating national economic growth.
Fiscal policy, with one of its functions centered on regulating state revenues, has the potential to encourage significant innovation in various economic sectors.
This can be a solution to improve the economy at various levels of society, including the banking, corporate, and microbusiness sectors.
When implemented wisely, fiscal policy can create an environment that supports investment, business development, and employment opportunities.
So that it can trigger sustainable economic growth and help achieve greater economic prosperity for the entire community.
Fiscal policy not only maintains stability but is also an important motor for the nation’s economic growth and development.
2. Maintain price stability
Sudden increases in the price of goods can be influenced by various factors, ranging from positive factors such as increased demand to unfair actions such as monopolistic practices or commodity hoarding.
To prevent and overcome this, fiscal policies are needed that aim to maintain the stability of the prices of goods so that these prices remain affordable for the public.
3. Increase employment opportunities and human resources
When investment levels increase, this can create new opportunities for employment and ultimately reduce unemployment, which is often a serious problem in many countries.
Apart from that, fiscal policy can also contribute to increasing the potential of human resources (HR), such as through programs such as the Smart Indonesia Card.
The aim of such a program is to improve the quality of the workforce of productive age so that they can compete in the labor market and, ultimately, improve the country’s economic level.
Types of Fiscal Policy
Basically, understanding the types of fiscal policy is very important in helping governments plan and implement strategies that suit their economic conditions and goals, as well as minimizing the negative impacts that may arise from these policies.
Please note that the types of fiscal policy are divided into two types, namely:
1. Contractive
The next type of fiscal policy in terms of implementation is contractionary fiscal policy. This policy involves reducing government spending and increasing tax rates.
The main goal of contractionary fiscal policy is to control the level of inflation and reduce the level of economic inequality, which is often measured by the Gini ratio.
2. Expansive
Expansionary fiscal policy is a policy taken by the government when the economy experiences a downturn by increasing the spending budget and reducing or eliminating taxes for certain sectors.
The aim of expansionary fiscal policy is to increase people’s purchasing power for goods and services so that companies can maintain production and avoid laying off workers.
Fiscal Policy Instruments
Understanding fiscal policy instruments is critical because it allows governments to design, implement, and evaluate economic policies more effectively. Fiscal policy instruments include various tools or actions that the government can use to regulate the country’s economic activities. Fiscal policy instruments have several important components in economic regulation, including:
1. Taxes
One of the main components of fiscal policy is tax regulation in the domestic and foreign sectors. The government can manipulate taxes in various ways, such as by reducing, adding, delaying, or even eliminating certain taxes. The main aim of this tax manipulation is to achieve the desired fiscal policy objectives.
2. Expense Expenses
The next component is government spending. These expenses can also be adjusted according to needs.
When a country’s balance of payments faces a deficit, the government can reduce spending in certain sectors. For example, postponing the payment of holiday allowances (THR) for civil servants (PNS) as a savings measure
3. Public Bonds
The next fiscal policy instrument is the issuance of bonds (debt securities) to citizens. In contrast to foreign debt, public bonds provide rewards in the form of an interest rate, or “coupon rate,” when the government returns the loan to the public. This can be an important source of funding for government projects.
4. Budget Allocation
The final component is budget allocation. The government has the authority to move budget allocations from one sector to another in order to achieve fiscal policy objectives within a certain time period.
For example, during a pandemic, the government can prioritize budget allocations for health facilities as a response to emergencies.
An Example of Fiscal Policy
Getting to know examples of fiscal policy is very important because real examples can provide a better understanding of how these policies are implemented in practice and what impact they have on a country’s economy. The following are examples of fiscal policy in Indonesia, namely:
1. Fuel subsidies
Another example of fiscal policy is fuel oil (BBM) and gas subsidies. This policy aims to facilitate community mobility and support economic transactions by reducing the burden of fuel costs.
2. Increase in COVID-19 Budget
One example of fiscal policy is increasing the budget for handling the COVID-19 pandemic.
In emergency situations such as this pandemic, the government can allocate additional funds for the health sector, purchasing medical equipment, providing support for affected communities, and implementing economic stimulus programs to overcome the economic impact caused by the pandemic.
This policy aims to strengthen the government’s response to the health and economic crisis caused by COVID-19.
3. Tax amnesty
One example of fiscal policy in Indonesia is tax amnesty, which is a tax exemption or tax reduction for a certain period of time for individuals or companies who are willing to report all their assets to the government.
4. Determining the Highest Retail Price (HET)
Another example of fiscal policy is setting the highest retail price (HET) for a number of certain goods, such as medicines and basic necessities. The HET policy aims to regulate the maximum selling price so that these goods remain affordable to the public.
Differences between Fiscal Policy and Monetary Policy
Apart from fiscal policy, another term that is often encountered in the world of economics is monetary policy. These two types of policies have different goals and act in unique ways.
Fiscal policy regulates state income and expenditure, while monetary policy is a strategy implemented by the government to control inflation by regulating the amount of money in circulation.
Another difference is the source of policy; namely, fiscal policy comes from the government, while monetary policy comes from the central bank. Monetary policy achieves its goals by regulating interest rates, which in turn affect the costs of borrowing and spending by individuals and businesses.
Apart from that, monetary policy also aims to increase people’s income by encouraging investment and production, which in the end can increase economic growth.
Importantly, both fiscal and monetary policies can be implemented simultaneously or separately, depending on needs and the ongoing economic situation.
Crypto Fiscal and Tax Policy
For your information, the Indonesian government has now officially implemented a tax on crypto assets, or crypto tax, in accordance with the HPP Law (Income Tax Law) through technical implementing regulations regulated in Minister of Finance Regulation (PMK) Number 68/PMK.03/2022.
It is important to note that investment in crypto assets in Indonesia has significant growth potential.
For example, one type of crypto asset that is quite well known, namely Bitcoin, has experienced an increase in value of thousands of percent, increasing from around $3–5 per coin to reaching $50,000 per coin.
This makes crypto assets very attractive to the public as a profitable investment option.
Director of Counseling, Services, and Public Relations (P2Humas) of the Directorate General of Taxes (DJP) of the Ministry of Finance (Kemenkeu), Neilmaldrin Noor, explained in press release Number SP-29/2022 how the tax considers crypto assets as commodities that meet the criteria as a tax object value added (VAT).
Basically, fiscal and tax policies on crypto assets are closely related in the context of economic regulation. Crypto asset fiscal and tax policies can support each other in regulating and exploiting the economic potential associated with blockchain technology and digital assets.
Government efforts to regulate and maximize the benefits of crypto assets often involve a combination of various policy instruments, including regulation, fiscal incentives, and tax arrangements.
Conclusion
In conclusion, fiscal policy has a very important role in managing a country’s economy. This includes various steps taken by the government regarding state income and expenditure as well as tax arrangements.
Basically, fiscal policy is a powerful tool in the hands of the government to control the economy. This allows the government to respond to economic changes, promote healthy economic growth, and maintain macroeconomic stability.
On the other hand, individuals also have a role in understanding and influencing fiscal policy. By understanding the basic concepts of fiscal policy, individuals can better understand how these policies affect their lives, from the taxes they pay to the fiscal incentives they may take advantage of.
With the right knowledge and active participation, individuals can play a role in shaping fiscal policies that reflect the needs and aspirations of society.
