11 July 2025 (closed)
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Indonesia's Rising Budget Deficit: Examining Fiscal Health, Policy Responses & Future Prospects
This year, the Indonesian government’s budget deficit is expected to be significantly wider than initially targeted when determining the 2025 state budget (APBN 2025).
Initially, this deficit was projected at 2.53 percent of gross domestic product (GDP). However, after the first six months of 2025 have passed, the latest projection (made by Indonesia’s Finance Ministry) points at an IDR 662.0 trillion (approx. USD $40.7 billion) full-year deficit, which is equivalent to 2.78 percent of GDP.
While this means that Indonesia’s budget deficit certainly remains at a safe level, it is approaching the critical 3.0 percent threshold, and therefore has been generating some more-than-usual attention in Indonesian media. Therefore, we want to delve a bit deeper into this topic.
Indonesia’s 3 Percent Budget Deficit Rule
Indonesia was badly hit by the Asian Financial Crisis that erupted in 1997. In fact, without this crisis, Indonesia would perhaps look different today as this crisis truly rocked (and in some regards profoundly changed) the political, economic, financial, fiscal, and social foundations of the country.
Indonesia was particularly affected by the Asian Financial Crisis because of a fragile banking sector and substantial unhedged foreign debt. For Indonesia, the financial component of the crisis started with the rupiah experiencing a drastic devaluation, plummeting from around IDR 2,400 per US dollar in December 1996 to around IDR 16,000 per US dollar in January 1998.
This sharp depreciation crippled businesses with dollar-denominated debts, leading to widespread bankruptcies and a severe credit crunch. Indonesia’s banking sector, which was already weakened due to poor oversight, suffered widespread bank runs. Meanwhile, inflation soared to 65 percent in 1998 while unemployment surged.
Poverty rates then nearly doubled, exacerbating social unrest across the country and culminating in the resignation of President Suharto in May 1998. Suharto had led Indonesia for over three decades (1967-1998), using a highly corrupt authoritarian regime (New Order) that had always been able to justify its permanent presence by pointing to impressive social and economic achievements between 1967 and 1997. But now that the economy was in shambles in 1997 and 1998, its legitimation was gone too. This implied a loss of credibility, authority, and social acceptance.
And so, a financial crisis had snowballed into an economic, social and political crisis, or in other words a ‘total crisis’ (Krisis Total or Kristal). Despite an IMF bailout, the initial policy responses actually intensified the panic, highlighting the deep-seated issues within Indonesia's financial system.
Though painful, the crisis served as a crucial lesson for Indonesia's new generation of politicians. One such lesson involved Law No. 17 of Year 2003 on State Finances. This law stipulates that the annual state budget deficit is not allowed to exceed 3.0 percent of GDP. This rule has become one of the cornerstones of Indonesia's fiscal discipline, and has thus contributed significantly to maintaining investor confidence and a relatively low debt-to-GDP ratio compared to many other G20 countries.
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