JAKARTA: As President Prabowo Subianto prepares to deliver the Financial Notes in a speech before the People’s Consultative Assembly on Friday, kicking off the formal drafting of next year’s state budget, attention has turned to how the plan will shape the nation’s economy.
Economists stress that creating a credible plan is more important than painting a bold aspiration, as the government continues to propose ambitious economic growth targets while seeking to uphold fiscal prudence.
Permata Bank chief economist Josua Pardede told The Jakarta Post on Tuesday that small changes in the budget plan were “normal, given that the economy keeps shifting”, but he emphasised that creating a devisable plan was imperative since the document functions as a benchmark and signal for households, businesses, banks and investors.
“What’s dangerous is big, recurring deviations because that way the budget would lose its function as the policy anchor. [...] The point is, the 2027 state budget should not be a very ambitious document, but rather a most-trusted document,” said Josua.
The initial process of drafting the state budget, involving both the government and the House of Representatives, had been carried out in May, resulting in an initial document containing macroeconomic outlines that were further deliberated until June.
The outlines form the building blocks of the state budget bill, which will be discussed at length throughout August and September before being passed into law to guide policy execution next year.
The outlines contain macroeconomic assumptions, including gross domestic product growth, inflation and the exchange rate, alongside fiscal projections such as state revenue and spending, as well as the budget deficit.
The GDP growth target was set at between 5.8 and 6.5 per cent in the assumptions, well above the typical 5 per cent pace Indonesia has maintained over the past decade and a half, largely to accommodate the administration’s goal of achieving 8 per cent growth during Prabowo’s term.
Indonesia recorded economic growth of 5.61 per cent in the first quarter of this year and 5.29 per cent in the second quarter, not far off the 5.4 per cent target set in the 2026 budget plan.
The government had been pursuing and signalling aggressive growth strategies to attain the 8 per cent milestone, which became a cause for concern in the markets, since it is directly connected to the budget deficit.
Government spending is among the bases of growth stimulants in Indonesia, financed by state revenue until expenditures exceed income, resulting in a budget deficit that pushes the government to take on debt to fill the gap.
The country has legally capped the budget deficit at 3 per cent of GDP and debt at 60 per cent of GDP, far above the current standings of around 40 per cent, after it was overrun by a crisis in the late 1990s.
Indonesia had consistently met the two caps since several years after the law’s passage in 2003, excluding the pandemic. Many credited the consistency to prudent fiscal management.
However, Prabowo in 2024 tested the boundaries by saying that reaching 50 per cent debt-to-GDP ratio was “okay” and that the 3 per cent deficit cap was “arbitrary”.
The market did not pay a great deal of attention to these statements, until ominous signs appeared on the balance books.
One of the biggest red flags investors caught was Prabowo’s growth lever, the free nutritious meal programme, an initiative with a colossal budget, which recently fuelled public dissatisfaction that prompted the President’s approval ratings to go into free-fall.
The programme’s execution has been marred not only by food poisoning incidents but also corruption.
Nevertheless, the government was at first adamant about keeping the money flowing into the initiative.
This insistence led many to believe that the government was being less than prudent about the possibility of a ballooning deficit just to fund the programme, causing foreign capital to flee in the first few months of this year.
The stance started to reverse when it became apparent that the United States-Israeli war on Iran would last longer than expected, pushing oil prices higher than the presumed amount in the state budget, translating to less room for spending as energy subsidies needed prioritising.
These heavy external pressures dawned together with worsening sentiment, irrespective of the relatively good fiscal performance.
The nadir occurred in June when the rupiah touched a new all-time low of over 18,200 per US dollar.
The market pressures, combined with macroeconomic reality, pushed the government to “be more prudent” in fiscal management, economics professor at Airlangga University Rahma Gafmi told the Post on Tuesday.
Not only did government officials keep reiterating that it would go all out to keep the deficit below 3 per cent of GDP this year, it also cut the allocation for the free meals programme by about Rp 40 trillion ($224 million) to walk the talk.
Moreover, the government also set a very conservative target band for next year’s deficit, at just 1.8 to 2.4 per cent of GDP, far below this year’s projection of 2.85 per cent GDP.
Rahma described the deficit target as “narrow” and said it would automatically translate to “limited” room for fiscal stimulus, in which case the government “has to massively rely on private and non-budget financing”, for example through state asset fund Danantara.
With the smaller room in mind, Rahma said reaching the low band of the growth target was “plausible” under optimal conditions but the higher band “only functioning as an aspirational projection”.
However, Permata Bank’s Josua said it was incorrect to claim that prudence only sprung up now after all the pressures materialised, since Indonesia had proven merit; “What changed in the past few months was the government’s emphasis on [budget] discipline”. - Jakarta Post/ANN
