The COVID-19 pandemic made governments around the world impose severe social and business restrictions, thus contributing heavily to the unprecedented decline in economic activity. To maintain society’s support, governments subsequently had to spend heavily on social assistance, soft loans, and various fiscal incentives to keep most businesses alive and allow poorer segments of society to have enough to eat.
And so, with tax revenue down but state spending up, governments are now facing the ‘debt pandemic’ (even though the COVID-19 pandemic is still far from over). If we zoom in on Indonesia we can take a look at the (projected) government’s budget deficits to see the financial burden. After the Asian Financial Crisis in the late-1990s Indonesia had learned some important lessons and therefore imposed much more prudent fiscal management, including a legal cap on the government’s budget deficit of three percent of gross domestic product (GDP).