Prabowo's First Year Fiscal Direction: Swelling Debt, Widening Deficit

Also read: 2025 State Budget Deficit Target Widens, Entrepreneurs Remind to Be Careful

In the detailed fiscal targets for 2025, the government has set a deficit target of 2.45-2.80 percent against gross domestic product (GDP). This figure is approaching the maximum fiscal deficit limit of 3 percent against GDP mandated by the law. The deficit range is also wider than the target in the 2024 state budget of 2.29 percent against GDP.

In addition to widening deficits, the government's debt ratio is also increasing. RKP documents note that the target debt balance or government debt ratio is 39.77-40.14 percent of GDP. Instead of decreasing, this figure has risen from the target debt ratio of 38.26 percent in 2024, even approaching the debt ratio level during the Covid-19 pandemic (39.4 percent in 2020 and 40.7 percent in 2021).

Along with the widening deficit and increasing debt requirements, the government spending target in RKP 2025 has also increased from 14.56 percent of GDP (in the 2024 APBN) to 16.15-17, 80 percent of GDP. This consists of central government spending of 11.96-13.35 percent of GDP as well as transfers to regions of 4.19-4.45 percent of GDP.

The government's more detailed work plan will be included in the preparation of the Draft State Budget for 2025, which will soon be discussed by the government and the House of Representatives (DPR).

If the global geopolitical situation continues to heat up, fiscal risks will increase, while on the other hand, the room for deficit changes has already narrowed.

The RKP and RAPBN 2025 were prepared by the Joko Widodo-Ma'ruf Amin regime, but implemented by the new regime which took office in October 2024. According to the real calculation results, Prabowo Subianto-Gibran Rakabuming Raka received the most votes in the 2024 Presidential Election and are just waiting for the decision by the General Election Commission (KPU).

According to the Deputy Director of the Institute for Development of Economics and Finance (Indef), Eko Listiyanto, on Tuesday (23/4/2024), the increase in state spending, which is tackled by the strategy of widening the fiscal deficit and increasing the debt ratio, is a consequence of populist promises made by the incoming government.

Prabowo-Gibran promised a number of populist policies during the campaign, such as a flagship program to provide free lunches and milk for school children, pregnant women and toddlers, which requires a total budget of around IDR 400 trillion.

Eko assesses that from a fiscal caution aspect, widening the deficit by up to 2.8 percent and the swelling debt ratio will bring increased fiscal risks.

Market confidence in Indonesia's economic fundamentals will be more vulnerable amidst global and domestic economic sentiments. Moreover, the current state of the global economy is slowing down and full of turbulence.

Also read: Direction of the Transitional APBN amidst Narrowing Fiscal Space

"The risk increases because the room for maneuver to widen the deficit becomes narrower as the limit is 3% of GDP. If the global geopolitical situation continues to heat up, fiscal risks will increase. Meanwhile, on the other hand, the space for deficit change has narrowed," said Eko, without mentioning the forbidden words.

Guma dampens the potential of fiscal risks, and he believes that the fiscal deficit range should not be raised to nearly "hit the ceiling" approaching the 3 percent limit. Thus, if there is fiscal and monetary instability, there is still room to expand the deficit below the safe limit.

"Targeting a deficit below 2.5 percent will provide more room to reduce fiscal risks," he said.

Meanwhile, Teuku Riefky, a researcher in Macroeconomics and Finance at the Faculty of Economics and Business, University of Indonesia, believes that in normal conditions, fiscal deficits and national debt should be kept low in order to ensure careful management of the country's finances.

However, in the midst of uncertain global economic conditions due to increasing geopolitical tensions, high United States interest rates, and expensive costs of debt, the widening deficit is understandable.

We must carry out innovative financing to maintain fiscal risk management in the future.

"So, it seems that the fiscal posture in the 2025 RKP is set as a shock absorber for current economic conditions. Prudent (wise) or not, of course the lower it is, the more prudent However, it seems that this is still at a fairly safe level because it is still in line with our fiscal guidelines," said Riefky.

The strategy to balance the need for large expenditures without widening the deficit and increasing debt is to boost state revenues. The deficit and debt targets set in the RKP 2025 have actually taken into account the increase in state revenues, from 10.12 percent of GDP (in the 2024 State Budget) to 11.20-12.00 percent of GDP.

The RKP also targets an increase in the tax revenue ratio (tax ratio) of 10.0-12.0 percent of GDP by 2025. Currently, the tax ratio is around 9-10 percent. In 2023, the national tax ratio will be 10.21 percent.

However, Eko observes that, aside from the concept of changing the institution by establishing the State Revenue Agency (BPN), there has yet to be any breakthrough strategy to boost tax revenues in the future. The establishment of BPN is also likely to require a significant transitional period.

Also read: The State Revenue Agency is not a "Panasea" Tax Problem

"The first and second years seem to still be grappling with the transition and adaptation process for strengthening internal institutions. It may only be in the third year that breakthroughs will be seen in increasing revenue. However, the adaptation process must go well if we want to improve revenue performance in the medium term," said Eko.

Deputy Minister of Finance Suahasil Nazara said that fiscal risk management must be maintained to ensure a healthy state budget. One way to achieve this is by collecting state revenues more effectively and accompanied by more efficient spending.

"We must carry out innovative financing to maintain fiscal risk management in the future," he said.

Furthermore, he emphasized that in accordance with President Jokowi's directives, every ministry/agency must design a work plan while still incorporating the vision, mission, and direction of the elected president's policies and programs.

“It is the task of K/L to ensure that there iscontinuity of development. "When preparing the RKP and the main points of fiscal policy, we still have to pay close attention to the policy directions and programs of the elected president," he said.

There is no longer a need for a transition team because this (new government) is sustainable.

Coordinator Minister for Economic Affairs Airlangga Hartarto said that the RKP 2025 has incorporated the new government's policy plans in its entirety. Therefore, the process of formulating future policy directions will not require a transitional team as was the case during the change of leadership from President Susilo Bambang Yudhoyono to Jokowi after the 2014 election.

Further discussions about the future government work plan will continue after the KPU announces the winner of the 2024 Election on April 24, 2024. "After the decision by the KPU, there will be official follow-up meetings. There is no need for a transition team anymore because this new government is ongoing. All of it is already included in the APBN structure," said Airlangga.