Differences in fiscal and monetary policy

in the country’s macroeconomic management Governments implement at least two types of policies: fiscal policy and monetary policy. Although both policies aim to address the country’s economic problems, but in reality These two policies have different scopes.

Fiscal policy is macroeconomic policy on government revenue and expenditure budgets; monetary policy is Policy on domestic currency circulation

There are the following details on the difference between fiscal policy and monetary policy:

1. Regulators

in Indonesia The entities that govern these two policies are different entities. Fiscal policy is managed by the Ministry of Finance and related institutions such as the Directorate General of Taxes, while monetary policy is regulated by Bank Indonesia. Despite their differences, both agencies are still responsible for their performance to the House of Representatives (DPR).

2. Tools

Monetary and fiscal policies also differ in terms of instruments. (tools and measures) used to achieve policy goals Here are some of the tools used by Indonesian banks to perform their duties:

• Market Open Operations (open market policy). In this instrument, BI trades securities with relevant banks and institutions to increase or reduce liquidity. (market amount)
• Discount policies include increasing or decreasing the standard interest rate.
• Minimum cash reserve (Alternate Requirements) Bank Indonesia determines the percentage of all customer funds deposited in the form of deposits to no longer be converted into loans (Credit
• Optional credit policy. In this case, BI recommends that commercial banks choose to provide more credit to their customers. Because prudent lending can increase the risk of a bank’s liquidity.
• moral appeal

In addition, Bank Indonesia sets macroeconomic targets such as inflation, etc. In general, Bank Indonesia’s policies do not directly affect the public. but through the intermediaries of commercial banks

For fiscal policy, it will be implemented with a wider variety of tools, such as increasing state revenues both tax and non-tax. Reducing income by increasing subsidies and other projects

3. How it works

A further difference between fiscal policy and monetary policy is the mode and delivery of jobs, for example, to increase economic growth. Bank Indonesia has set an expansionary monetary policy. By reducing the standard interest rate and guaranteeing liquidity for commercial banks. for commercial banks to dare to offer easy credit to customers The hope is that more customers apply for loans and use the loans to spin the wheel of their business or buy essential items.

On the other hand, to improve the wheel of the economy. Fiscal policy will work in a different way, for example by partial tax cuts to encourage expansion of MSMEs, or by providing direct cash assistance in the hope that this assistance can be used to purchase essential goods and services.

4. Role

The fundamental difference between these two policies is their role in achieving the target economic level. The role of monetary policy is to manage the economy by controlling the money supply. The money supply is regulated by raising the benchmark interest rate.

The role of fiscal policy is to manage the economy by controlling government revenue and spending. Government revenue may include taxes and non-taxes, such as grants and taxes. While government spending includes expenditures for civil servant salaries, subsidies, project operating costs and others, it also includes the management of the national debt both overseas and domestically.

5. Impact on investment

On the one hand, these two macroeconomic policies can also influence the investment climate. Either direct investment (FDI and DDI) or indirect investment. (purchase of stocks or other securities)

For example, taxes are an instrument of fiscal policy. Currently, income from stocks and bonds is one of the targets for income tax (PPh). The amount is 0.1% for stock sales transactions and 10% for dividends and bond coupons. So far, only mutual funds have. tax free Tax revenue goes to the state treasury.

As for the impact of monetary policy on investment, such as the change in the reference interest rate of bond prices and yields. An increase in the underlying interest rate can cause the price of a newly issued bond to be higher than the price of a previously issued bond. As a result, the price of previously issued bonds fell.

6. Effects on Exchange Rates

not only in capital market instruments Fiscal and monetary policies can also affect the forex market (foreign currency exchange rate/ foreign currency). in the forex market An increase in the domestic benchmark interest rate can attract foreign investors or traders to buy the rupiah and supply the dollar. As a result, the exchange rate of the rupiah against the dollar increased.

The impact of fiscal policy on the rupiah to dollar exchange rate is likely to be indirect. For example, a policy of increasing import taxes on luxury goods PPnBM (Tax Sales of Luxury Goods) can simultaneously increase state revenues from taxes. together to prevent entrepreneurs from importing goods Thus, the exchange rate of the rupiah to the dollar can be stable.

7. Challenge

Different tools and mechanisms create different monetary and fiscal policy challenges. For example, low interest rate policies have been unsuccessful in promoting consumption and productivity in society. or vice versa High interest rates are not successful in getting people to increase their savings amount or investment volume.

in fiscal policy This challenge may take the form of targeted policy implementation, such as the use of direct cash assistance (BLT) to citizens in hopes of increasing their purchasing power. Often the problem with implementing BLTs in the field is that many people who are not poor receive assistance for one reason or another. while the poor are not getting help Of course, this would make the effectiveness of fiscal policy questionable.

Monetary and fiscal policies must be complementary and proportionate, according to Troy Segal on the website. InvestopediaImproper use of policies will not benefit the economy much. such as fiscal policy Excessive fiscal policy will actually increase inflation.

In terms of monetary policy, Segal cited the Great Depression as an example. Federal Reserve (Central Bank of the United States) Try to calm the country’s economy by lowering interest rates in the hope that savings will increase and deflation will stop. But in fact, monetary policy did not have much effect on people’s economic conditions at that time.