As one of his final acts before leaving office, Indonesian President Joko “Jokowi” Widodo signed into law the national budget for 2025. This budget is worth scrutinizing in some depth because although it was developed and approved during the Jokowi administration, it will be implemented by his successor Prabowo Subianto and gives us our first glimpse into how fiscal policy will be carried out under the new president.
Prabowo spooked markets last year by suggesting he wanted to supercharge the economy to 8 percent annual growth, and was willing to run large fiscal deficits in order to do so. Along with a widely circulated claim during the campaign about a $30 billion free lunch program, there was some concern that Prabowo would discard fiscal discipline in pursuit of budget-busting projects.
Indonesia remains committed to spending big on social welfare as on Prabowo’s childhood nutrition program, as well as on infrastructure. Following Prabowo’s inauguration, the government was also restructured in a way that created a number of new ministries and posts, all of which are now competing for budgetary resources. Can the budget accommodate Prabowo’s spending priorities and expanded government, while keeping the deficit manageable? The short answer is, yes.
The first thing one notices when perusing the 2025 budget is that fears about uncontrolled spending have been largely overblown. In fact, in the most important ways, the 2025 budget maintains strong continuity with other Jokowi-era budgets. By law, Indonesia is not allowed to run a deficit in excess of 3 percent of GDP in a given year. The 2025 budget is projecting a deficit of 2.53 percent of GDP, which is well below the legal limit and very much in line with the kind of deficits Jokowi ran for most of his presidency.
Prabowo’s childhood nutrition program is moving forward, but with a $4 billion price tag, it will cost considerably less than $30 billion, a figure that never made sense to begin with. There are valid questions about how effectively this program is being designed and implemented, but given the overall state of Indonesia’s balance sheet, spending $4 billion on childhood nutrition is unlikely to place undue strain on government finances. For a sense of scale, total spending for 2025 has been set at around $226 billion.
In order to make room for these new priorities, other expenses are being trimmed. It’s clear that fuel subsidy reform of some kind is on the way. The cost of government subsidies (both energy and non-energy) has ballooned since the pandemic, reaching a projected $19.4 billion in 2024. The 2025 budget envisions subsidies falling by 1.9 percent to $19 billion. This is still a considerable sum, but it signals that government largesse is not unlimited and the political will is gathering to try and target subsidies better. If done properly, this will free up spending for other priorities.
Another option for increasing spending without running huge deficits is to raise taxes. A somewhat under-discussed story in Indonesia is that Jokowi and Finance Minister Sri Mulyani pushed through several tax reforms that have really helped boost revenue and shore up the country’s fiscal position.
As part of those efforts, a planned increase in the Value Added Tax was set to kick in on January 1, with the government projecting that tax revenue would grow by 7 percent in 2025. At the last minute, the VAT increase was scaled back with as-yet-unknown implications for government revenue. Indonesian budget planners have a pretty good track record with revenue forecasts, however, so it’s probably not going to be hugely impactful.
The important thing when it comes to Indonesia’s ability to increase spending while managing the deficit is not the VAT increase or the childhood nutrition program. It’s that the economy must keep growing at or around its recent pace of 5 percent per year. For now, the 2025 budget is anchored by the assumption that economic growth will come in at 5 percent (notably, not 8 percent). As long as it does so, Indonesia should be able to comfortably afford its spending plans even if it incurs some new debts to pay for them.
This is why deficits are typically measured as a percentage of GDP and not in absolute terms. They are a function of the government’s ability to incur liabilities relative to national economic output. As the economy grows, so too does the state’s spending power and Jokowi left Prabowo in reasonably good shape here. Taking rash actions that might rock the boat (like bursting through the 3 percent deficit limit when capital markets have signaled they will not look kindly on it) seems rather unlikely.