Although realization of most components in Indonesia's state budget have improved in 2017, tax revenue realization and the management of energy subsidies remain the two big challenges for the Indonesian government. Southeast Asia's largest economy again failed to meet its tax revenue target last year. Per 31 December 2017 it collected IDR 1,151.5 trillion (approx. USD $85.3 billion) in tax revenue, only 89.74 percent of the target (excluding customs and excise).
The tax revenue shortfall of Indonesia reached IDR 132.4 trillion (approx. USD $9.8 billion), higher than the government's earlier forecast of IDR 110 - 130 trillion. Despite the shortfall, Indonesian Finance Minister Sri Mulyani Indrawati said 2017 tax revenue - particularly non oil & gas tax revenue - was a significant improvement from earlier years. Customs and excise revenue, on the other hand, exceeded the 2017 target.
Indrawati added that commodity prices remained fragile last year and this impacts heavily on many companies engaged in the mining and agriculture sectors. Within the fragile state of the economy, it would not be wise for Indonesia's Tax Office to push for high taxes, thus possibly triggering a contraction. This was also cited as reason for non-optimal tax revenue realization in 2017.
Another reason why the 2017 tax revenue target was not met is that the target was simply set too high. In recent years, the Indonesian government has continuously set unrealistically high tax targets (the last time it achieved the target that was set in the state budget was in 2009). Although on the one hand it is important to set high targets (particularly as the country's tax-to-GDP ratio is still very low hence there is ample room for tax revenue growth) in order to keep tax officials on their toes, it is also important for targets to be in tune with reality (otherwise the credibility of the budget is jeopardized). Moreover, too high targets can actually demotivate tax officials as they know from the start that the target cannot be achieved.
In 2018 Indonesia's tax revenue is expected to rise supported by the automatic exchange of information that will be implemented by the Indonesian government in September 2018 (allowing countries to share information about taxpayer data) as well as the recently completed tax amnesty program that has added considerably to the country's taxpayer base. Due to the large number of participants the Tax Office is still busy adding data to its database.
Meanwhile, the government paid IDR 97.6 trillion in subsidies last year, equivalent to 108.6 percent of the target that was set in the (revised) 2017 state budget (IDR 89.9 trillion). Realization of spending on fuel and LNG subsidies rose from IDR 43.7 trillion in 2016 to IDR 47 trillion in 2017, primarily due to higher crude oil prices. Secondly, despite tariff adjustments in the first half of 2017, electricity subsidy spending exceeded the target in 2017, rising from IDR 45.4 trillion in 2016 to IDR 50.6 trillion in 2017. This shows the government still needs to do some homework in order to curtail energy subsidies. Non-energy subsidy spending, on the other hand, shows a decline in 2017.
Considering the central government stated that it will not raise prices of subsidized fuels until at least March 2018, it implies rising pressures on the state budget as crude oil prices have been climbing (hovering around USD $60 per barrel).
In IDR trillion, unless otherwise indicated
|A. Domestic Revenue||1,733.0||1,648.1||95.1|
|1. Tax Revenue||1,472.8||1,339.8||91.0|
|2. Non-Tax Revenue||260.2||308.4||118.5|
|A. Central Government||1,367.0||1,259.6||92.1|
|B. Transfer to the Regions||766.3||742.0||96.8|
|1. Transfer to the Regions||706.3||682.2||96.6|
|2. Village Funds||60.0||59.8||99.6|
|Budget Deficit (% of GDP)||2.92||2.57|
Source: Finance Ministry of Indonesia