THE RELATIONSHIP BETWEEN TAX RATIO AND INTEREST RATES TO DEFICIT FINANCING STRATEGY IN INDONESIA: PUBLIC ECONOMICS APPROACH
DOI:
https://doi.org/10.65886/ijde.v2i02.34Keywords:
Deficit financing, Tax ratio, Interest Rate, Public economyAbstract
This study analyzes the relationship between tax ratio and interest rate on deficit financing strategy in Indonesia in the period 2002–2024. Data were obtained from World Development Indicators (WDI) and Central Statistics Agency (BPS) to identify the relationship between financing deficit, tax ratio, and interest rate. The results of the study indicate that (i) a powerful negative relationship between tax ratio and financing deficit with a correlation of -0.8900 (p-value = 0.000), indicating that an increase in tax ratio contributes to a decrease in deficit; (ii) interest rate has a strong positive relationship with financing deficit with a correlation of 0.5241, (p-value = 0.0103), indicating that an increase in interest rate tends to increase the deficit; and (iii) no significant relationship was found between tax ratio and interest rate. The urgency of this study lies in Indonesia’s fiscal condition, which is still facing a prolonged deficit amidst a low tax ratio and interest rate volatility. At the same time, few studies have explicitly examined the simultaneous relationship of these two variables to the deficit. Therefore, this study is an empirical baseline to support data-based deficit financing policymaking. Unlike previous studies, this study uses Pearson Correlation analysis to descriptively describe the strength of the direct relationship, covering a wide period from 2002 to 2024. These findings provide a new contribution to the public economics literature and reinforce the importance of an integrated analysis of state revenue and monetary dynamics.
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