Kicking them while they are down: the phrase aptly illustrates what U.S. President Donald Trump’s tariff bomb does, or is about to do, to Indonesia’s economy, which has been down for quite some time. In 2024, according to the Ministry of Manpower, as many as 77,965 workers were laid off. This, in turn, caused enough of a dent in the average household’s purchasing power that it set of deflation for five months in a row, from May to September 2024. The start of the year-end holiday season ended this deflation chain, but there was still a visible decrease of holiday spending at the end of 2024 compared to the previous year.
Then came 2025, which started inauspiciously with the last-minute cancellation of the proposed increase in value added tax (VAT) by President Prabowo Subianto’s government. The damage had partially been done, however, as the pre-emptive inflation preceding the proposed VAT had already taken place. It is important to note that the pre-emptive inflation that occurred at the end of 2024 and early 2025 was not a result of the previous deflation period. Instead, it was triggered by market anticipation of the government’s plan to raise the VAT rate from 11 to 12 percent on January 1, 2025. Crucially, it happened while household purchasing power was plummeting.
After that came the fiscal implication of the Coretax debacle. Coretax is a new digital tax system developed by Directorate General of Taxes, which aims to improve tax compliance and revenue collection. However, the system has resulted in technical difficulties during taxpayer reporting such as system crashes and other operating issues, which saw a historic collapse in tax revenue, which fell by 41.86 percent year-on-year in January, followed by a 30.19 percent decline in February. The government responded by trying to tighten its belt, but the move included some very unpopular measures such as proposed cuts to education funding and a postponement of civil servant appointments for more than seven months.
Meanwhile, the government seemed adamant to carry on with programs that are both expensive and did not inspire market confidence, such as Prabowo’s free school meal program and the formation of the Danantara sovereign wealth fund, which could siphon more money from the state’s shrinking coffers. Unsurprisingly, the market reacted unfavorably. On March 18, the Indonesia Stock Exchange dropped by 5 percent less than three hours after the open, triggering a temporary halt in trading.
So even without Donald Trump slapping a harsh “reciprocal” tariff on imports from Indonesia, the country’s economy is already in a bad enough shape; and whether the tariff ends up being 32 percent or 10 percent, it is about to get worse. So far, the government’s policy has been inadequate to keep the economy afloat. A change of policy is required to mitigate the coming crisis.
Maintaining Domestic Purchasing Power
Normally, the classic Keynesian answer to this problem would some form of government intervention in the economy. By pumping money into the economy through many public work projects, the government could help households maintain their purchasing power by providing work amid the economic downturn. However, there are some caveats to this possible solution.
First, the whole point of the government intervention at the time of economic downturn is to keep the economy going by safeguarding the purchasing power of the average household so it should not fall too low, thus keeping up the demand for goods and services. Therefore, the government has to prioritize expenditures that help the household consumption, such as procurement programs that are labor-intensive, direct cash transfers, and financial incentives for small businesses.
In addition, while Indonesia needs to respond to external shocks by rolling out more stimulus, the government is heavily constrained by its shrinking fiscal headspace, and limited in its capacity to issue stimulus packages by itself. Hence, it could work together with Bank Indonesia to issue adequate levels of stimulus through a monetary-fiscal policy mix.
Second, the government also needs to reassess some of its flagship programs such as the free school meal program and critical mineral downstreaming program. The former could help household purchasing power, but not in its current form. Research by CELIOS has suggested that distributing the free meal equally to every schoolchild could lead to a 34.2 percent inclusion error, where the children from rich households also receive what is supposed to be a welfare program for schoolchildren from middle and lower income backgrounds. The current school meal program also relies on big vendors which have less impact on the local economy. Thus, to increase its effectiveness in propping up average Indonesian households’ purchasing power, the program needs to be overhauled by being more targeted and involving local businesses more.
As for the downstreaming program, it needs to be scaled back. The international market has been thrown into disarray thanks to Trump’s blanket tariff, and thus it would be unwise to keep pursuing export-oriented programs in this uncertain international environment. The government has to prioritize domestically-oriented policies first.
Third, in order to finance various public works projects and shore up household consumption, the government needs a robust and reliable taxation system. The problematic and unreliable Coretax system needs to be reevaluated, while the Directorate General of Taxes has to reinforce the capacity of its personnel.
Last, a special measure has to be taken to minimize unemployment. This could take many forms, from soft loans for starting small businesses to specific skill training courses for the unemployed. As Trump’s tariffs have caused great uncertainty in the global market, we cannot expect reliable sources of employment from big private sector firms, and therefore these measures should be focused on small local businesses.
A Refrain, Not a Submission
As much as it is tempting to follow in the footsteps of China and apply a retaliatory tariff on American goods, the government has been right to refrain from doing so, as it would be counter-productive for the economy and undermine the goal of maintaining households’ purchasing power.
On the other hand, there is no need to cave in to Trump’s bullying tactics. The 90-day grace period offered by Trump is likely a false hope, the carrot to the tariffs’ stick. A hasty, almost knee-jerk decision to send three ministerial-level delegations to Washington, D.C. in order to appease Trump could be counterproductive in the long run. The seven key points that Coordinating Minister for Economic Affairs Airlangga Hartarto is reportedly bringing to the negotiation table sound less like a national strategy and more like a national capitulation. He has offered zero tariffs for U.S. goods and preferential treatment for U.S. companies. This might appease the market for the time being, but in the long-run it might lead to deindustrialization for Indonesia. Worse, the influx of cheap agricultural products from the U.S. could slowly strangle our already struggling farmers to death. So much for Prabowo’s plan for agricultural self-sufficiency.
What Indonesia can do instead, is to offset the threat of Trumpian tariffs by deepening trade relations and regional cooperation with other countries. Forging a trade agreement that lowers the trade barrier with Indonesia’s major trading partners, including China and Japan, or increasing regional cooperation with fellow ASEAN countries – for instance, through critical minerals downstreaming cooperation in intra-ASEAN trade – are much better moves than either tit-for-tat retaliation or total capitulation.
Ultimately, what Indonesia needs is to avoid kowtowing to Trump’s demands, while undertaking reforms to mend our already battered economy. The government should not sell the people’s future for a short-run gain; it needs to re-evaluate its own domestic economic policy first before hastily offering any concession to a foreign party.