Abstract

During the late 1980s, the Indonesian authorities implemented a strong fiscal adjustment program to strengthen the fiscal position and contain Indonesia’s public debt, which had risen sharply in the early 1980s. Despite these measures—and sustained improvement in fiscal balances in the 1990s—the level of public debt remains relatively high. Meanwhile, the volume of a major government asset, oil reserves, has declined significantly, reflecting lower oil prices and depletion of the resource. In view of the recent widening of the current account deficit and the volatility of global capital flows, this paper examines whether further fiscal consolidation would reduce the vulnerability of the economy to unfavorable external conditions and help sustain savings, investment, and growth.