Fiscal Update Indonesia: Can the 3% of GDP Budget Deficit Cap Be Widened?
A commission in Indonesia's House of Representatives advises the government to replace a law that sets a maximum budget deficit limit of 3 percent of gross domestic product. This law was implemented in 2003 after Indonesia experienced the devastating effects of the Asian Financial Crisis in the late 1990s. Traumatic experiences made the government decide to prioritize prudent fiscal policies. Although it is unclear what the exact consequences are if the government would breach this cap (perhaps an impeachment bid could be launched), governments always respected the cap.
Considering that Indonesia's tax amnesty program experienced a slow start (perhaps indicating that the whole program will not live up to expectations), while tax revenue realization only stood at 46.8 percent of the full-year 2016 target (IDR 1,320 trillion) at the start of August, there could occur a bigger budget shortfall than initially expected. The expected revenue shortfall of IDR 219 trillion (approx. USD $16.6 billion) in the 2016 State Budget already led to a cut in spending. Last month Finance Minister Sri Mulyani Indrawati slashed spending by IDR 137 trillion (which were taken from the ministerial and agency budgets as well as the regional transfer budget).
Sri Mulyani said these budget cuts were needed as initial calculations regarding the 2016 State Budget did not reflect economic reality in an ongoing low (global) economic growth and low commodity price environment, while a sudden boost in Indonesians' tax compliance would be a miracle. Moreover, the budget deficit started to come closer and closer to the 3 percent of GDP cap.
Melchias Markus Mekeng, Vice Chairman of Commission XI - which oversees finance, national development planning, banking and non-bank financial institutions affairs - in the House of Representatives (DPR), says there is the option to widen the budget deficit cap as that would imply that the government does not need to cut its spending targets too drastically (if the government cuts its spending programs, then it automatically jeopardizes successful accelerated economic growth). Allowing a wider budget deficit could be a solution.
However, this proposal will probably meet resistance both in the House and government as the mandatory three percent of GDP budget deficit cap has become a big (psychological) cap in the minds of Indonesian policymakers. In the late 1990s a weak financial sector (which lacked any monitoring; even the country's central bank had no idea about the amount of foreign debt, particularly privately-held debt) became the center of the crisis and Indonesia needed to accept billions of US dollars in bailout packages. This financial crisis led to a severe political and social crisis in Indonesia.
Read more: Causes & Consequences of the Asian Financial Crisis
Spending cuts are not confined to the 2016 State Budget. Earlier this week Finance Minister Sri Mulyani also announced that the budget for the Ministry of State-Owned Enterprises will be cut in the 2017 State Budget. In the 2017 State Budget a total of IDR 243.9 billion has been allocated to this ministry, while it only spent IDR 124.8 billion in full-year 2015. An allocation of IDR 160 billion in 2017 should be enough according to Sri Mulyani (although this decision will require approval from the House).
Indonesia's Tax Collection Target and Realization 2008 - 2015:
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |
| Target (in IDR trillion) |
534.5 | 597.5 | 661.4 | 878.7 | 885.0 | 995.2 | 1,072.4 | 1,294.3 |
| Realization (in IDR trillion) |
607.4 | 563.2 | 650.0 | 872.6 | 835.3 | 916.3 | 985.1 | 1,055.6 |
| Balance (in IDR trillion) |
72.9 | 34.3 | 11.4 | 6.1 | 49.7 | 78.9 | 87.2 | 238.6 |
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