Government & House of Representatives Discuss Controversial Tax Reform Bill
The COVID-19 pandemic made governments around the world impose severe social and business restrictions, thus contributing heavily to the unprecedented decline in economic activity. To maintain society’s support, governments subsequently had to spend heavily on social assistance, soft loans, and various fiscal incentives to keep most businesses alive and allow poorer segments of society to have enough to eat.
And so, with tax revenue down but state spending up, governments are now facing the ‘debt pandemic’ (even though the COVID-19 pandemic is still far from over). If we zoom in on Indonesia we can take a look at the (projected) government’s budget deficits to see the financial burden. After the Asian Financial Crisis in the late-1990s Indonesia had learned some important lessons and therefore imposed much more prudent fiscal management, including a legal cap on the government’s budget deficit of three percent of gross domestic product (GDP).
This legal cap was, however, untenable in the COVID-19 crisis. Via an emergency law the government’s budget deficit was allowed to widen beyond three percent of GDP for three years (2020, 2021, and 2022). In 2020, Indonesia’s fiscal gap widened to IDR 956.3 trillion (approx. USD $67 billion), equivalent to 6.1 percent of GDP (the widest shortfall in decades).
This fiscal burden should ease starting from 2021 as Indonesia’s economic recession is expected to be over per Q2-2021 (although Indonesia is now experiencing a risky increase in new COVID-19 cases that forces authorities to impose harsher social and business restrictions). However, the Indonesian government (the Finance Ministry in particular) needs to find ways to boost tax revenue – on the short term – in order to increase chances of meeting the fiscal deficit targets set in the table above.
In that context, the Indonesian cabinet and House of Representatives (DPR) are in talks to revise Indonesian Law No. 6 of Year 1983 on General Tax Provisions and Procedures. Indonesian Finance Minister Sri Mulyani Indrawati told Commission XI of the DPR that:
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