Tax Incentives and Social Spending Amidst COVID-19: A VECM Analysis in a Subnational Government (case of Jakarta province, Indonesia)

This study aims to analyse the responses of both the short-term and long-term tax incentives and social spending for economic growth during the Covid-19 pandemic crisis periods, using DKI Jakarta Province, Indonesia, as a case study. The pandemic imposed significant challenges on the regional economy, necessitating governmental measures to ease financial burdens on enterprises and households while protecting vulnerable groups. The research applies the Vector Error Correction Model (VECM) for time-series data for the period 2007–2022. The dataset consists of publicly available statistics of the Central Statistics Agency of Indonesia and information from the Directorate General of Fiscal Balance, Ministry of Finance. This model will be utilised to test the interrelationship that exists between tax incentives, social spending, and economic growth in both the short and long term. While expenditures on social assistance were critical to stabilize the economy in the short term, their role in economic growth over the long term seems limited. These findings underscore a balanced fiscal policy not only at short-run but also along with the long-run dimension, notably with respect to revenue raising as well as the composition of expenditures. The findings reveal that tax incentives play an important role in stimulating short-term economic growth by increasing consumption and investment. During the pandemic, measures such as the reduction in property taxes, vehicle tax discounts, and the waiver of administrative penalties effectively reduced the financial burden, thus stimulating business operations and consumer spending. In contrast, long-term tax incentives, consonant with objectives of revenue augmentation, such as infrastructure and educational spending, appeared to play a more significant role in economic growth. Social spending, though, was instrumental in the short term for stabilizing the economy during the crisis by maintaining consumption at pre-crisis levels and providing for the at-risk populations. However, fiscal constraints limited the long-term effect of social spending on economic growth.