JAKARTA (ANN/THE JAKARTA POST) – This year, Indonesia’s central government anticipates a significantly larger fiscal deficit than initially planned, driven by heightened expenditure and a shortfall in tax collection compared to the projections outlined in the 2024 state budget.
Indonesian Finance Minister Sri Mulyani Indrawati disclosed on Monday that the deficit is now forecasted to reach 2.7 percent of gross domestic product (GDP), surpassing the 2.29 per cent figure set out in the budget plan.
Speaking before the House of Representatives’ budget committee, Sri Mulyani attributed the expanded deficit projection to a dual effect: “state revenue undergoing a correction” and “positive growth in state spending”.
In her presentation, Sri Mulyani outlined that tax revenue for this year is expected to achieve only 96 per cent of the targeted amount.
Despite this shortfall, she underscored that the nominal value would still indicate a 2.9 per cent annual increase, signalling a resilient national economy.
Shortly beforehand, she had revealed that the government had been struggling to collect taxes in the first half of 2024 because of the “decline in commodity prices” taking a toll on corporate profits.
Overall tax revenue in the first half was down seven per cent year-on-year (YoY), with corporate income tax plummeting 34.5 per cent YoY.
Collection in the mining industry experienced the most significant contraction at 58.4 per cent YoY, followed by manufacturing with a 15.4-per cent annual decline.
State spending, on the other hand, was projected to be almost 2.6 per cent or IDR87.1 trillion (USD5.36 billion) over budget, driven by spending on central government ministries and agencies, which is seen to exceed the planned figure by almost 10 per cent.
Sri Mulyani mentioned that funding for the construction of the new capital city of Nusantara, social assistance and regional elections was among the factors fueling the higher spending.
“The same goes for spending on [energy] subsidies and compensation, which is estimated to rise due to [greater] volumes, the [lower rupiah] exchange rate and [higher] prices,” said Sri Mulyani.
Domestic oil and gas lifting for the year is projected to fall short of the target, which would force the country to import more of the commodities, resulting in increased spending.
The rupiah is now projected to average around IDR16,000 per dollar this year, far below the assumption of IDR15,000 set in the state budget, meaning the country must spend more in rupiah terms to pay for its imported oil and gas in US dollars.
The minister also pointed out that the government had spent IDR155.7 trillion on subsidies and compensation payable to state-owned energy companies in the first half, mostly for fuel and electricity, and would need to fork out more for these items in the second half.
Despite the deficit now expected to amount to IDR609.7 trillion rather than the IDR522.8 trillion stated in the 2024 budget plan, Sri Mulyani vowed not to rely heavily on bonds to fill the gap, so as to maintain “the competitiveness of our bond yield”.
The current high interest rate environment globally makes financing through bond issuance more costly, but the government has one more financing source in its toolbox, namely unused funds from earlier budgets.
With the help of these funds, Sri Mulyani aims to issue IDR214 trillion less in bonds than the IDR666.4 trillion initially planned in the budget.
The minister filed a request to draw down another IDR100 trillion of these unused budget funds for this year’s financing, which the House budget committee approved on Tuesday.
Wijayanto Samirin, an economist at Paramadina University, told the source on Monday that the weak tax collection was caused by “inferior GDP growth” in 2023 that resulted in lower corporate tax revenue this year.
He also said that this year’s tax collection was projected to be lower due to “unconvincing GDP growth in 2024”, the first quarter of which, he argued, was chiefly pushed up to 5.11 per cent by the Ramadan festive season, the general election, as well as increased social assistance.
“Actually, what’s more concerning is the medium- and long-term trajectory. Premature deindustrialization resulted in a decline in the [tax] contribution from the manufacturing sector. […] Meanwhile, the manufacturing sector and the formal sector are the main sources of our tax revenue,” said Wijayanto.
“So, the [cause] of our revenue problem is not cyclical, it’s very structural indeed. If we combine that with larger state expenditure in the coming years, including for social assistance, Nusantara and debt servicing, then our problem is complete,” he added.
Center of Economic and Law Studies executive director Bhima Yudhistira Adhinegara told the source on Monday that the potentially swelling deficit was “a warning” for president-elect Prabowo Subianto, given that his programs, which many perceive to be expansionary, were not even included in the calculation yet.
“Our state budget is [hardly in great shape], so a rationalisation of programs is needed, including for the IDR71 trillion budget allocation for the free school meals [program]; maybe it can be reduced. [The new capital city plan] also requires budget rationalisation so as to safeguard fiscal credibility,” said Bhima.
