The Impact of Budget Retrenchment on Income Distribution in Indonesia (including Statistical Annex) : A Social Accounting Matrix Application

This document sets out a new method for assessing the implications of public expenditure cuts for income distribution. The instrument is a social accounting matrix providing the appropriate conceptual framework for estimating all the direct and indirect effects of changes in any given category of public expenditure (e.g. agricultural investment or education spending). By using this matrix it is possible to calculate the upstream effects of an adjustment measure on income distribution. It shows, for instance, that a decline in agricultural investment reduces employment and wages in the building sector. Similarly, a fall in education spending depresses the incomes of the skilled dependent labour force. The downstream effects have also been estimated: in the case of education this means cutbacks in free services to families and so a fall in their incomes. This method has been applied to Indonesia in 1984-88 by comparing the observed effects of lower public spending due to structural ...