Earlier this week Indonesian President Joko Widodo sent the proposal for the 2017 State Budget to Indonesia's House of Representatives (DPR). The proposed budget is regarded far more realistic compared to previous budgets drafted by the Indonesian government and therefore speculation immediately suggested that former World Bank managing director Sri Mulyani Indrawati, who became Indonesia's new finance minister in the latest cabinet reshuffle, had big input in this more pragmatic 2017 budget.
Visible in the table below is that the main problem with Indonesia's recent state budgets is that the Indonesian government, particularly after 2013, set far too ambitious targets for its tax revenue. Given that the Indonesian economy experienced a structural economic slowdown between 2011 and 2015 (implying that businesses have limited room for expansion and therefore will not contribute significantly to higher tax revenue), while commodity prices went downhill over the same period, it was highly unrealistic to target for sharply jumping tax revenues over these years.
Although it is important to set high targets, it is also vital to remain realistic in order to safeguard a stable budget deficit (or fiscal deficit) and safeguard the continuation of the government's spending programs on matters such as infrastructure and social development programs. In 2016 the fiscal deficit could reach 2.5 percent of the country's gross domestic product (GDP), not far away from the legal limit that is set at 3 percent of GDP. If the deficit becomes too close to the legal limit, then the government has no other option than cutting its spending budgets (the infrastructure budget is expected to become the first victim if such a scenario would occur).
The 2017 State Budget proposal that was sent to the DPR sets the budget deficit at 2.41 percent of GDP. Government spending is proposed at IDR 2,070.5 trillion (approx. USD $158 billion) in the 2017 budget proposal, up 5.5 percent (y/y) from spending that is targeted in the Revised 2016 State Budget.
Meanwhile, government revenue is proposed at IDR 1,737.6 trillion (approx. USD $132.6 billion) in the 2017 budget proposal, which is lower than the government's initial revenue assumption in the 2016 State Budget (IDR 1,822.5 trillion). Finance Minister Sri Mulyani Indrawati sees government revenue realization in 2016 at IDR 1,567.2 trillion.
Indonesia's Tax Collection Target and Realization 2008-2016
(in IDR trillion)
(in IDR trillion)
(in IDR trillion)
¹ per 6 August 2016
In the first seven months of 2016 the Indonesian government only managed to collect IDR 775.2 trillion in state revenue, just 43.4 percent of the full-year target. This weak performance is primarily caused by weak tax revenue. Tax revenue that includes customs as well as excise fees stood at IDR 618.3 trillion in the January-July 2016 period, or 40.2 percent of the full-year target.
Meanwhile, the government's spending programs are more-or-less on track so far this year. In the January-July 2016 period government spending reached IDR 1,037.6 trillion or 49.8 percent of the 2016 target (IDR 2,082.9 trillion). To overcome the widening discrepancy between state income and spending, Finance Minister Indrawati said the government may plan to expand the range of objects for excise, while also continuing to push for higher tax compliance and tax base through the tax amnesty program.
GDP Growth Indonesia
The government set its GDP growth target for 2017 in the budget proposal at 5.3 percent year-on-year (y/y), unchanged from its growth target in 2016. This may disappoint some who are eager to see the government pushing for accelerated growth next year. However, in recent years we witnessed that the Indonesian government set too ambitious GDP growth targets with the consequence that it had to revise these figures (downward) on several occasions. Next year, we could in fact see the opposite: if the global economy indeed improves while government-led infrastructure development in Indonesia causes the multiplier effect within the economy, the government may need to revise this growth target upward (if the targets set in the proposed 2017 budget draft is approved by the DPR).
In the second quarter of 2016 the Indonesian economy expanded more rapidly than forecast at 5.18 percent (y/y). Full-year 2016 GDP growth is expected to reach the range of 5.1 - 5.2 percent (y/y).
Indonesia's Quarterly GDP Growth 2009-2016 (annual % change):
|Year|| Quarter I
||Quarter II||Quarter III||Quarter IV||Full-Year|
Source: Statistics Indonesia (BPS)
Poll Indonesia Investments:
Where do you see Indonesia's economic growth in full-year 2016?
Voting possible: -
- Between 5.0% - 5.2% (55%)
- Between 5.2% - 5.4% (19%)
- Below 5.0% (15.5%)
- More than 5.4% (10.5%)
Total amount of votes: 611