Fiscal Credibility: Indonesia's Tax Target Realistic in 2017 Budget Draft

Given the experiences over the past couple of years, it is rather remarkable that the Indonesian government decided to set a lower tax revenue target for 2017 while the Indonesian economy is in fact expected to accelerate moderately, reflected by a better-than-expected Q2-2016 GDP growth result. This is contrary to what we observed in previous years.

Over the past couple of years the structural economic slowdown (which implied pressures on tax revenue collection from corporate tax due to companies' limited room for business expansion and pressures on tax revenue collection from VAT due to people's weaker purchasing power) did not influence the Indonesian government when determining the tax revenue targets. Moreover, the structural drop in commodity prices after 2011 (implying pressures on tax income from exports and sales) did not impact on the government's tax revenue targets. Lastly, the nation's notoriously low tax base and low tax compliance also failed to impress the government when determining tax revenue targets.

As a result, there occurred a widening gap between tax revenue targets and tax revenue realization in recent years. The table below shows that the gap rose rapidly after 2011. As tax income is the largest source of government income, it also implied rising pressures on the fiscal deficit (which has come closer and closer to the legal limit of three percent of the nation's gross domestic product). Lastly, this widening fiscal deficit could make the government decide to cut its spending budgets. The government's infrastructure budget would most likely become the first victim and this would disappoint investors who have high hopes for government-led infrastructure development in Indonesia.

Indonesia's Tax Collection Target and Realization 2008-2016

	2008	2009	2010	2011	2012	2013	2014	2015	2016
Target (in IDR trillion)	534.5	597.5	661.4	878.7	885.0	995.2	1,072.4	1,294.3	1,318.9
Realization (in IDR trillion)	607.4	563.2	650.0	872.6	835.3	916.3	985.1	1,055.6	538.2¹
Balance (in IDR trillion)	72.9	34.3	11.4	6.1	49.7	78.9	87.2	238.6
Realization (%)	106.9	90.9	98.3	99.3	94.4	92.1	91.9	81.6

^{¹ per 6 August 2016}

But this time it is a different story, possibly due to the input of Sri Mulyani Indrawati, a former World Bank managing Director who currently serves as Indonesia's finance minister (she replaced Bambang Brodjonegoro in the latest cabinet reshuffle). If she had to choose, Finance Minister Indrawati seemingly prefers to overdeliver rather than overpromise considering the tax revenue target in the 2017 state budget.

As such, despite forecasts for accelerating economic growth in 2017 as well as a larger tax base on the back of the country's ongoing tax amnesty program, Indonesia targets for lower tax revenue in next year's budget. It is a remarkable change of course but surely boosts Indonesia's fiscal credibility. The government proposes economic growth at a pace of 5.3 percent (y/y) in the 2017 budget draft proposal, slightly up from the 5.2 percent (y/y) target in the Revised 2016 State Budget.

Poll Indonesia Investments

Provided government-led infrastructure development can cause the much-needed multiplier effect in the Indonesian economy, the tax amnesty program lives up to (government) expectations, the global economy improves and commodity prices somewhat rise, then the 5.3 percent (y/y) GDP growth target could actually be an understatement rather than an overpromise. In that case, contrary to what we have seen in previous years, the government may need to revise its GDP growth target upward next year.

In a press conference Indonesian Finance Minister Sri Mulyani Indrawati said the government needs to find the middle way between strengthening its tax revenue but at the same time safeguarding a competitive investment climate to attract investment. Earlier, Indonesian President Joko Widodo and the finance minister had informed that they seek to cut corporate income tax from 25 percent currently toward 17 percent somewhere in the future in an effort to make Indonesia more attractive for investment.

Indrawati also informed that the government is eager to achieve the tax revenue target in 2017 by broadening the tax base and encouraging tax compliance. The tax amnesty program (which runs until 31 March 2017) is one of the strategies to accomplish this. However, the government will also strengthen its information technology system in order to have more means to monitor tax compliance.

Poll Indonesia Investments

One of the structural problems that gives rise to low tax revenue in Indonesia is people's low tax compliance. In Indonesia there are only about 27 million registered tax payers, while it is estimated that there are 120 million people that should pay taxes (and the country has a population that numbers 255 million). As a result, Indonesia has a tax-to-GDP ratio of just 12 percent, among the weakest worldwide.

Overall, the 2017 budget draft proposal of Indonesia should be likened by (foreign) investors. One of the weaknesses of Indonesian governments in recent years was that it targeted for unrealistic tax targets. Setting unrealistic tax revenue targets leads to a reduction in credibility. With a more realistic budget, the fiscal credibility of Indonesia should improve.

‹ Kembali ke Berita Hari Ini

Bahas

Silakan login atau berlangganan untuk mengomentari kolom ini