FISCAL SUSTAINABILITY, PUBLIC DEBT, AND ECONOMIC GROWTH: THE CASE OF INDONESIA

This paper is designed to analyze the impact of public debt on economic growth in the case of Indonesia over the period of 1999-2009. First, we explore the literature of the debt dynamics as well as fiscal sustainability. Second, we develop a fiscal model of economic growth. Finally, we estimate it empirically. Based on the quarterly data analysis, we found that the domestic debt does not have any contribution on economic growth. Even the external public debt affects negatively on economic growth. We conclude that those findings are associated with the cost of debt services and the efficiency of debt usage. In order to maintain fiscal sustainability, it is therefore recommended that the country should rely on internal loans and borrow externally, when necessary only for real productive projects. In addition, the other domestic financial resources should be mobilized in order to get the cheaper debts.