Analyst Opinion: Indonesia Should Focus on Boosting Purchasing Power
An Indonesian analyst says the Indonesian government needs to increase efforts to boost people's purchasing power in order to achieve the government's economic growth target of 5.3 percent in 2016. Household consumption in Indonesia accounts for about 55 percent of the nation's total gross domestic product (GDP) growth. As such, if purchasing power continues to weaken, then the economic slowdown returns. The analyst suggests the government should consider to cut personal and corporate income taxes, delay the electricity tariff hike for 900 VA households, and lower fuel prices.
Based on recent GDP growth figures, the economy of Indonesia is currently in the 'recovery phase' after having experienced an economic slowdown since 2011. In the first three quarters of 2015, Indonesia's economic expansion has stabilized at 4.7 percent (y/y) and it is highly likely that the slowdown has reached its bottom. One encouraging sign is that Indonesia's Q3-2015 GDP growth outpaced economic expansion in the preceding quarter (in Indonesia it rarely happens that Q3-2015 is stronger than growth in the preceding quarter). Moreover, forecasts of the Indonesian government, Bank Indonesia, International Monetary Fund, World Bank and Asian Development Bank all indicate that Indonesia's economic growth will finally start to accelerate in 2016.
Indonesian economist Firmanzah (lecturer at the Jakarta-based Paramadina University) said the government needs to cut corporate and personal income taxes in order to boost people's purchasing power, despite the fact that the Indonesian government recently already raised the taxable income threshold for individuals from an annual IDR 24 million (approx. USD $1,750) to IDR 36 million (approx. USD $2,630). Now, when the salary is higher than the new IDR 36 million per year threshold, then he/she is subject to pay an income tax ranging between 5 and 30 percent (depending on the exact amount of the salary).
Firmanzah also emphasized that the government should delay implementation of higher electricity tariffs for 900 VA households as this move will raise the country's poverty rate. Currently, there are an estimated 28.59 million Indonesians living below the poverty line (March 2015 data), equivalent to 11.22 percent of the total Indonesian population, according to the latest data from the nation's Statistics Agency (BPS). Last month, the Indonesian government and House of Representatives (DPR) agreed on cutting electricity subsidies for 450 VA and 900 VA households by disconnecting those people that are currently enjoying cheap electricity rates while they are not classified as 'poor' or 'near-poor' and thus are not entitled to the subsidized price (one well-known strategy to get the subsidy is by installing more than one connection of 900 VA inside a home).
Composition Indonesia's GDP Growth in Q3-2015
| Growth (y/y) |
|
| Household Consumption | 4.96% |
| Government Consumption | 6.56% |
| Investment | 4.62% |
| Export | -0.69% |
| Import | -6.11% |
| GDP | 4.73% |
Source: Statistics Indonesia (BPS)
He added that the central government has a big role to play in guiding and supporting the regional governments. Fund transfers to the regions and villages has increased considerable in the 2016 State Budget (to IDR 770 trillion, or approx. USD $56 billion). However, these funds will not be spent effectively if the central government does not cooperate, assist and monitor activities in the regions. Especially considering that on 9 December Indonesia will see local elections it is important for the central government to check whether new leaders can manage the local budgets carefully and effectively.
Economic growth in Indonesia is expected to reach 5 percent in 2016, according to Firmanzah, below the government's 5.3 percent target set in the 2016 State Budget. He sees external pressures coming from looming monetary tightening in the USA, economic turmoil in China as well as from the Eurozone, and the persistent weak commodity prices.
Economic Growth Assumptions:
| Country/Region | GDP Growth Forecast 2015 | GDP Growth Forecast 2016 | ||
| IMF | World Bank | IMF | World Bank | |
| Indonesia | 4.6% | 4.7% | 4.9% | 5.3% |
| USA | 2.6% | 2.7% | 2.8% | 2.8% |
| European Union | 1.5% | 1.5% | 1.6% | 1.8% |
| Japan | 0.6% | 1.1% | 1.0% | 1.7% |
| China | 6.0% | 7.1% | 6.3% | 7.0% |
| World | 3.1% | 2.8% | 3.1% | 3.3% |
Sources: IMF and World Bank