Indonesia’s 2024 budget has been approved by the national legislature, and while there may be a few tweaks here or there before it is passed into binding law, we know what the basic structure will look like and can talk about some of the key takeaways.
The first takeaway, and I think an underappreciated story in Indonesia’s recent fiscal history, is about taxes. Nobody likes taxes but they are necessary to run a government and tax reform has been something of a recurring theme with the Indonesian government lately. Over the last few years the Ministry of Finance has greatly expanded efforts to collect them, and the consumption tax was bumped from from 10 percent to 11 percent in 2022.
The results are pretty clear. Tax revenue increased from $99 billion in 2019, to a projected $136 billion in 2023 which is $6 billion more than budget planners had initially forecast. This extra revenue will help narrow the budget deficit from an anticipated 2.84 percent of GDP to just 2.3 percent.
The 2024 budget assumes tax receipts will increase by another 9 percent next year, bringing total revenue (from both tax and non-tax sources) to $178 billion next year. Some of this increase has been coming from one-off things like sky-high commodity prices driving up export taxes and non-tax revenue from the exploitation of natural resources.
But those won’t be reliable sources of revenue forever. By widening the domestic tax base and improving collection, the Ministry of Finance is ensuring Indonesia has a more sustainable long-term source of revenue which is not dependent on the exploitation or export of natural resources. The gains made in just the last few years have been significant, and given the government more fiscal policy space. As long as the Indonesian economy keeps growing, this revenue stream will only get bigger.
This brings us to the second key takeaway, which is about macroeconomic indicators and assumptions. Budget planners believe the Indonesian economy will grow by 5 percent in 2024, around the same rate of growth as in 2023. Inflation is expected to come in at 3 percent or below, and the rupiah will hover at 15,000 to the dollar. I think these are reasonable assumptions.
With a stable macroeconomic environment and more revenue coming in, total public spending is set to increase by nearly 6 percent compared to 2023, to around $212 billion at current exchange rates. Under this scenario, the total deficit will be $34 billion, or 2.3 percent of GDP. This is relatively modest, especially given that GDP is projected to grow by 5 percent.
This sets up the third and final takeaway, which is about spending. Can Indonesia afford its big spending plans, which include money for the new capital city, for large-scale military acquisitions, and for major infrastructure projects like the $7.2 billion Jakarta-Bandung High Speed Rail? I think the answer is yes. The government did take on significant amounts of new debt during the pandemic, and there has been a lot of recent discussion about whether big projects and struggling state-owned companies pose systemic risks.
But fiscal and balance of payment crises are usually about short-term cash crunches. Governments incur liabilities to foreign creditors and then don’t have enough liquid assets to meet obligations when they come due, or don’t have enough foreign exchange reserves to back-stop the currency in the event of capital flight.
If we look at Indonesia’s overall fiscal condition, the risk of those things is very low. The deficit is shrinking even as spending rises. Revenue is increasing. The economy is growing. Bank Indonesia has large foreign exchange reserves. Inflation is moderate. These are all indicators of a reasonably good fiscal outlook.
Often, especially in election years, people zero in on the details of controversial projects like whether or not the Indonesian government should have guaranteed Chinese debt from the Jakarta-Bandung High-Speed Rail. But what we should really be looking at is the big picture, and that tells a different story. The government’s total external debt (liabilities owed to non-residents) was $194 billion in July 2023, $7 billion less than in 2019. And the economy has grown since then, meaning foreign debt as a percentage of GDP is actually shrinking.
The 2024 budget shows that far from being weighed down by debt or unsustainable spending, the country’s fiscal position and macroeconomic environment are stable and revenue from the domestic tax base is rising. This means the Indonesian state can actually afford more spending, and can do so without adding tons of new debt. The real question, which will be hashed out in the months and years to come may perhaps be complicated by the impending change of political leadership, is whether that spending is being used wisely or not. And that is a much more complicated question.