DEBT THRESHOLD AND ECONOMIC GROWTH IN INDONESIA: DEBT LAFFER CURVE ANALYSIS

Miksalmina Miksalmina, Fakhruddin Fakhruddin, Cut Zakia Rizki

Abstract


Indonesia persistent episode of debt has been concerned by policymakers, researchers, and academicians. Due to continuous deficit experienced which create debt to carry out, issues on the fiscal policy of the imbalances in budget becomes important. The motivation of this study is due to the importance of knowing fiscal position since Indonesia has continuity budget deficit that accelerate high public debt. The increasing in public debt could affect decreasing fiscal space in development and could negatively affect economic growth. Debt has positive and negative effect on economic growth. Preventing negative effect of public debt on economic growth, so that the optimum debt should be identify to alert the fiscal position and can maintain economic growth. Using Debt Laffer Curve theory by using Fully Modified Least Square (FMOLS) found that the debt threshold in Indonesia is 33,55%. Since the empirical threshold is higher than current debt ratio, there is a tendency for government to increase debt until reach 33.55%. Moreover, policy maker needs to revise the existing debt threshold rule since the empirical and stated debt threshold is different.


Keywords


Debt, Economic Growth, Debt Laffeer Curve

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DOI: https://doi.org/10.24815/ekapi.v7i2.31642

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