The government of Indonesia may again revise the budget deficit target in the Revised 2016 State Budget (APBN-P 2016). Due to the widening shortfall (primarily caused by weaker than estimated tax revenue collection), the Indonesian government now expects the budget deficit to reach 2.7 percent of the nation’s gross domestic product (GDP), up 0.2 percentage points from the target that was set previously. The new figure is close to the legal cap of 3.0 percent of GDP stipulated by Indonesian law (a law that was implemented to safeguard the nation's fiscal fundamentals).
Indonesian Finance Minister Sri Mulyani Indrawati said a couple of factors explain why the government needs to prepare for a wider budget deficit. Firstly, Indonesia’s cost recovery scheme may turn out to be more expensive than was initially targeted this year. Through this program the government reimburses oil companies for their exploration and production costs. The budget for recovery costs was cut to USD $8 billion in the 2016 State Budget (from nearly USD $12 billion in the preceding year). However, there is a real possibility that costs will exceed the target as per July 2016 the oil recovery scheme already reached USD $6.5 billion.
Secondly, government spending realization is estimated to reach slightly over 97 percent in 2016. This is actually a great result (even though government spending was recently cut by IDR 137 trillion in the 2016 State Budget to prevent a bubbling budget deficit), but this success will also cause pressures on the budget.
Thirdly, government revenue is not in line with initial assumptions in 2016. Per August 2016, realization of government revenue only stood at 46.1 percent of the full-year target (IDR 1,784 trillion). As tax revenue contributes most (approximately 85 percent) to total government revenue, the expected IDR 219 trillion shortfall in tax revenue is to blame. Only a very successful tax amnesty program can somewhat limit this shortfall this year.
Indonesian Chief Economics Minister Darmin Nasution said the higher budget deficit is the logical consequence of the government's reluctance to cut government spending again as another cut in government spending would undermine the acceleration of Indonesia’s overall economic growth. After several years of economic slowdown the Indonesian economy is finally getting some momentum (accelerating to growth paces of 4.91 percent and 5.18 percent in Q1-2016 and Q2-2016, respectively). Government spending plays a big role in Indonesia’s economic growth and therefore another cut in public spending will surely cause the ongoing momentum to fade.