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“Indonesia Unveils Stimulus Package to Combat Coronavirus Impact”:

(https://www.aseanbriefing.com/news/indonesia-unveils-stimulus-package-to-combat-coronavirus-
impact/)
The article reports Indonesia’s decision to impose a fiscal policy worth US$725M to
minimize the economic impact caused by the Coronavirus outbreak as it instills uncertainty and fear
in its citizens and foreign travellers, giving the nation an insufficient aggregate demand in its
economy. Fear amongst its citizens have left them uncertain in consuming the usual recreational
goods and services. Given the vital role the tourism industry has on Indonesia’s GDP, many workers
of the country are left with smaller sources of income that is needed to boost the nation’s
consumption. In order to eliminate this resulting deflationary gap, the policy aims to change its taxes
and expenditures by incentivizing consumption and investment within its consumers and firms,
especially those part of the tourism industry. The effect of such a policy can be shown below:

As a result of the outbreak, Indonesia’s economy is believed to be at a deflationary gap with

its short run equilibrium at Y1P1 as the article reports an estimated loss of US$500 million in one of
Indonesia’s most vital industry, tourism. This short-term economic fluctuation of a short run
equilibrium at Y1P1 being less than the potential GDP Y2 is due to the insufficient aggregate demand.
Therefore, the following fiscal policy aims to shift the AD1 to AD2 of which its components include
consumption (C), and investment (I) spending. In the following policy, expenditure is being granted
to social media influencers to promote consumers on tourist hotspots, low-income households for
food to reduce their uncertainty, as well as a cut in the personal taxes of hoteliers and restaurant
owners, all of which increases the (C) of the economy. In addition, (I) is also expected to increase as
the government have reduced the business taxes of travel related firms, providing the opportunity to
invest in marketing promotions. With a resulting increase in AD, firms would be needing more labour
thus decreasing unemployment and increasing wages, subsequently increasing P1 to P2. The shift in
AD would result in long run equilibrium where AD2 and SRAS intersects at LRAS with an increased
GDP Y2. At this point P2Y2, the economy is seen to be at the potential and full employment output
thus demonstrating that the policy can eliminate the deflationary gap.
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Indonesia’s approach of relying on fiscal policy to combat this particular case of an epidemic
and its factors can be seen effective with first being their utilization of its ability to target specific
sectors. In the case of an epidemic, its transmission mainly brings a threat towards an economy’s
travel industry and Indonesia’s response of a fiscal stimulus with a focus on travel can directly repair
the deficient AD it had caused. The outbreak of a new epidemic may also raise uncertainties for
consumers and businesses as to what extent it can potentially affect the economy in the near future.
With this policy, it does not rely too deeply on the confidence of consumers to boost the economy’s
AD, unlike monetary policy in which banks may be too fearful to lend and consumers may be too
fearful to borrow in the event the economy does certainly take a heavy toll from the outbreak.
With fiscal policy countering these different factors, it is however only possible under some
assumptions. For example in this case, the aim of the government from providing funds is for
consumers to hopefully spend it on the declining tourism industry. To some consumers, there is a
possibility of spending it elsewhere, an event known as ‘crowding out’. Political constraints may also
arise as such policy may be undertaken as the government’s priority of the economy over the people’s
safety which leads to another flaw of this policy. During the making of this policy, it was done under
the assumption that Indonesia confirms no suspected cases of the virus in the country. In the event
that there are undetected/future cases, supply shocks would occur since workers are sick/quarantined
and this policy of increasing AD would drawback as it will simply boost inflation and potentially
stagflation. Furthermore, while the government is incentivizing travel consumption, it encourages
interpersonal contact with possible suspects. Ultimately, Indonesia is taking a risk with this situation
as funds could have rather been used on interventionist supply-side policies in case there are indeed
confirmed cases in the country. Investments in human capital, infrastructure, and technology would
have been a safer choice to directly increase the productive capacity of the economy to combat the
event of a supply shock caused by the virus.