Arnoldus Kristianus, Jakarta – Indonesia's push for aggressive budget efficiency risks backfiring on growth if executed indiscriminately, as economists warn that cutting spending too deeply could weaken one of the economy's main drivers.
Yusuf Rendy Manilet, a researcher at the Center of Reform on Economics (CORE) Indonesia, said the downside risks are tangible given the still-fragile state of household consumption and investment.
"While fiscally prudent, this policy can turn contractionary from a business cycle perspective if carried out too aggressively and without selectivity," Yusuf said on Tuesday.
The warning comes after the government trimmed Rp 306.69 trillion ($18.07 billion) in spending in early 2025, comprising Rp 256.1 trillion in ministerial and institutional budgets and Rp 50.5 trillion in regional transfers, coinciding with first-quarter economic growth of just 4.87%.
Recent data show state spending rebounding sharply. As of February 2026, expenditure reached Rp 493.8 trillion, up 41.9% year-on-year, driven by a 63.7% jump in central government spending and an 8.1% rise in transfers to regions.
However, Yusuf cautioned that the current budget adjustments appear more like short-term responses to external pressures rather than part of a comprehensive structural reform.
"A structural approach should address not just efficiency, but also the quality and composition of spending, including reallocations across programs," he said.
In practice, efficiency measures often hit goods and capital expenditure first, categories that have a direct impact on economic activity. Delayed projects and reduced procurement can ripple through the real sector, affecting businesses and employment.
"This helps explain why efficiency policies are often followed by short-term economic slowdowns," Yusuf added.
He also flagged the government's decision to maintain large-scale priority programs such as the Free Nutritious Meals (MBG) initiative. With sizable allocations, partial adjustments to such programs could create fiscal space without cutting more productive spending.
"When this option is not utilized, the burden of adjustment falls on expenditure items that have a stronger and more immediate multiplier effect on the economy," he said.
Minister of State Secretariat Prasetyo Hadi said the government has been consistently reviewing spending, particularly non-productive allocations such as official travel, to safeguard fiscal sustainability.
"Even without recent geopolitical developments, we have continued reviewing budget items and activities, as we did last year," Prasetyo said in Jakarta.
The government plans to tighten overseas travel budgets and delay non-essential programs to ensure state funds are directed toward more productive activities that support growth.
Economist Syafruddin Karimi of Andalas University said poorly targeted cuts could indeed suppress growth, but the risks can be mitigated if savings focus on non-priority and low-impact spending.
"The key distinction is between smart savings and reckless deficit expansion. Growth today depends not only on spending levels but also on macroeconomic stability that underpins business and investor confidence," he said.
He warned that widening the deficit could trigger market reactions, including higher bond yields, rupiah depreciation, and rising risk premiums, ultimately weighing on growth through higher financing costs and uncertainty.
"With the right design, the government is not sacrificing growth but improving spending quality so that every rupiah works more effectively amid global pressures," he added.
Meanwhile, University of Indonesia economist Telisa Aulia Falianty urged a more comprehensive and cautious approach, including refining large priority programs to make them more targeted rather than untouchable.
"Programs should continue, but with better targeting. Large allocations can still be made more efficient and redirected where needed," she said.
Telisa also called on the government to avoid rushed decisions and focus first on trimming clearly non-essential spending, such as excessive official vehicle and travel budgets.
Source: https://jakartaglobe.id/business/budget-cuts-risk-dragging-growth-if-done-blindly-economists-war