Indonesian lawmakers have begun debating potential changes to the country’s fiscal deficit ceiling, with several lawmakers arguing yesterday that President Prabowo Subianto’s administration should have the right to exceed the current limit in order to fund its ambitious welfare policies.
During a public hearing in Jakarta yesterday, the House of Representatives’ Commission XI debated a series of revisions of the State Finance Law. Passed in the wake of the Asian financial crisis of 1997-1998, the law sets a maximum budget deficit of 3 percent of gross domestic product and limits government debt to 60 percent of GDP.
Mukhamad Misbakhun, chairman of the House of Representatives’ Commission XI, told the hearing that the deficit limit should not necessarily be treated as a rigid annual threshold if the government needs additional fiscal space to support economic growth.
“Is 3% really ‘sacred’?” said Mukhamad, according to a report in the Jakarta Globe.
Misbakhun, who is also a lawmaker of the Golkar Party, a member of Prabowo’s expansive coalition, proposed that the law be revised to establish clear conditions under which a larger deficit could be permitted, such as when tax revenue is weak, or state energy subsidies rise due to a spike in global energy prices – as happened in Indonesia after the outbreak of the U.S.-Israel-Iran war earlier this year.
“We have the momentum to get out of the middle-income trap, take 233 million people out of middle income and head to high income,” Misbakhun said, according to Reuters. “That needs growth expansion. How are we going to expand growth if we lock ourselves and always talk about 3 percent?”
Mohamad Hekal, deputy head of the committee and a member of Prabowo’s party Gerindra, agreed that changes to the budget deficit ceiling should be discussed.
While a deputy finance minister said yesterday that the government is committed to keeping the 3 percent ceiling in place, the ongoing parliamentary debates are likely to be watched closely by institutional investors.
The State Finance Law was passed in 2003, as Indonesia was pulling itself up from the economic rubble of the Asian financial crisis, the political reverberations of which brought down the three-decade-long reign of President Suharto.
As one scholar noted at the time, the law marked “a major step forward in Indonesia’s drive to establish a sound system of public finance management and realize good governance.” More importantly, perhaps, the law was intended to reassure foreign investors that the country would maintain a disciplined fiscal policy after the chaos and corruption of the late Suharto years.
The fiscal deficit rule has been largely unquestioned by Indonesian governments in the two decades since, but has come under scrutiny since Prabowo took office in October 2024. Shortly before his inauguration, reports emerged that the former general was exploring ways to raise the fiscal deficit and debt-to-GDP ratio ceilings in order to fund his ambitious policy agenda. This included a multibillion-dollar free lunch program, a broad defense modernization plan, and an ambitious target of 8 percent annual GDP growth across his five-year term.
The suggestion that Indonesia was preparing to loosen, or even do away with, these financial safeguards unsettled markets, as did Prabowo’s bull-headed and unilateral approach to economic management. In March, both Moody’s and Fitch announced ratings outlook downgrades for Indonesia, with the latter citing the “increasing policy uncertainty and erosion of Indonesia’s policy mix consistency and credibility” and the “growing centralization of policymaking authority.”
This has contributed to a high turnover of personnel atop Indonesia’s main economic policymaking institutions. This week, Prabowo fired his finance minister, Purbaya Yudhi Sadewa, just over a year after his appointment, and replaced him with his deputy. Purbaya himself was appointed after the removal of Sri Mulyani Indrawati, who had served as finance minister under three presidents, over disagreements about the direction of economic policymaking under Prabowo. July also saw the resignation of Perry Warjiyo, the governor of Bank Indonesia.
“If the deficit ceiling is indeed raised from the current 3 percent of GDP, a potential positive impact would be greater flexibility in financing government programs,” the local brokerage Phintraco Sekuritas said, according to the Jakarta Globe. At the same time, this could also increase government debt and affect the absorption of government securities and corporate bonds issued by private companies.
“Furthermore, global investors and international rating agencies could perceive Indonesia’s fiscal discipline as weakening, potentially triggering credit rating downgrades, capital outflows and rupiah depreciation,” Phintraco Sekuritas added.
However, not all members of the Commission agreed that the deficit limits should be tampered with. Harris Turino, a lawmaker from the Indonesian Democratic Party of Struggle, the only political party in parliament that is not a member of Prabowo’s coalition, said that it was important to keep the deficit ceiling in place.
“If we are unable to discipline ourselves, including in maintaining the 3 percent deficit limit, the market will eventually discipline us,” he told Reuters.