Aid and fiscal behaviour in indonesia: the case of a lazy government

Abstract

This paper aims to assess the effects of aid on fiscal behavior in Indonesia. There are four main findings. First, aid inflow is primarily driven by the need to fill the fiscal gap. That is, aid is demand driven. Second, although project aid is by definition intended for development expenditures, it results in an increase in routine expenditure as well. This suggests that project aid is fungible: it creates extra resources available to increase nondiscretionary spending. Third, program aid tends to increase routine expenditure but not development expenditure; thus it mainly serves as budget support. Fourth, aid flows make the government fiscally .lazy.. The availability of aid is a disincentive to mobilise domestic revenue through a more efficient and effective taxation system.