THE GOVERNMENT BUDGET DEFICIT AND THE REAL SECTOR IN INDONESIA

Abstract

The main aims of the study are examine the effect of Indonesian government budget deficit which is financed from
internal and external debt: (i) the private sector which is predicted will lead crowding-out of private consumption
expenditures; (ii) foreign sector which is related with the trade balance or the twin deficits phenomenon and (iii) The
role of domestic interest rate to connect fiscal policy. The sources of data which are used in this study are secondary
data. The sources are published by many institutions. One of them is Indonesian Statistic books (Indonesian Bureau of
Statistic) from various years. Other sources are International Financial Statistics yearbook, Balance of Payment Statistic
yearbook and government financial Statistic yearbook which is published by IMF and Statistik Keuangan Ekonomi
Indonesia which is publised by Bank Indonesia. Our dataset consists of annual report from 1985 to 2011. The analysis
used simultaneous equations structural framework. The conclusion of the study shows that, (i) there is no crowding-out
effect on private consumption. It means the government budget deficit increased with relevance on government
spending then it has an impact on the decrease in private consumption level but not significant (ii) There is no twin
deficits problem in Indonesia. It means the increasing in government budget deficits does not raise the trade deficits (iii)
The domestic interest rate is significant to influence the demand for money. These results highligt the importance of
fiscal policies to manage government budget balances and arrage the interest rate related with the real sector.

Keywords: Government budget deficit; crowding-out consumption; twin deficits