Deni Ghifari, Jakarta – Economists say the government's macroeconomic assumptions for next year cast doubt on a 2027 budget plan that comes with relatively cautious goals for state revenue and expenditure.

"The fiscal targets look reasonably prudent on paper", as state revenue was planned to grow by about 8.6 percent while spending growth was set at 6.6 percent, Economist Intelligence Unit (EIU) Asia analyst Tay Qi Hang told The Jakarta Post on Monday.

"However, the 6 percent [gross domestic product] growth assumption itself looks more like political ambition than empirical projection, particularly since Indonesia has rarely cleared 5.5 percent in recent years, so the credibility of the whole revenue side hinges on that number holding up," said Tay.

The Financial Notes speech delivered by President Prabowo Subianto on Friday marks the beginning of the 2027 state budget deliberations.

In the speech, which is traditionally held on the working day before Independence Day, the President revealed the key numbers forming the basis of the entire budget plan.

The government and the House of Representatives will discuss these numbers in August and September before the bill passes into law and becomes the guideline for policy execution in 2027.

The unveiled GDP growth target of 6 percent proposed by the government is far above the typical 5 percent pace Indonesia achieved over the past 15 years.

"Set your dreams in the sky, so when you fall short, you will at least land among the stars", Prabowo said to justify ambitious policy targets, referring to a famous quote by Indonesian founding father Sukarno.

Because economic growth directly impacts the earning of businesses and individuals, missing the GDP target would jeopardize tax and nontax revenue collection and may necessitate increased state spending to stoke economic activity, thereby throwing into disarray the entire budget plan and possibly leaving a shortfall to be patched up by issuing additional government debt.

The 2027 budget plan outlined by Prabowo foresees Rp 4.01 quadrillion (US$225.31 billion) in state spending vis-a-vis Rp 3.43 quadrillion in revenue, translating to a deficit of Rp 671.2 trillion or 2.4 percent of the assumed GDP – far below the deficit of 2025 and the one projected for this year, both of which got close to the legal cap of 3 percent.

Tay said the deficit "signals that the government is trying to reassure investors over fiscal discipline" but added that achieving such ambitious growth with such a modest deficit "would be difficult", especially in the event of a global economic downturn.

Reaching the proposed targets, he suggested, may require ideal global conditions conducive to Indonesian exports, commodity revenues and investment.

Rahul Bajoria and Kai Wei Ang, economists at Bank of America, wrote in an analysis on Monday that their preliminary assessment on the budget plan was "more neutral than some of the positive market narratives".

"We would also caution against drawing firm conclusions at this stage, as the full budget documents had yet to be published at the time of writing," they continued, referring to the Financial Notes document and the bill.

In the past, the documents would normally be published on the day of the speech or shortly afterward.

The two economists noted that, while the deficit figure was set lower than this year's projection of 2.85 percent GDP, "in our view, this overlooks the projected jump in government debt issuance" next year.

"To obtain a clearer assessment of the government's financing needs, the headline fiscal deficit should be assessed alongside below-the-line investment financing, which is not subject to the statutory 3 percent of GDP deficit ceiling," wrote Bajoria and Kai.

They added that, taken together, the two determined the government's gross financing needs, which are funded through government debt issuance, loan financing and drawdowns of excess cash balances.

However, the pair noted that it is difficult to assess the exact allocation of below-the-line investment financing now "given the lack of details on the planned drawdown of excess cash".

Permata Bank chief economist Josua Pardede told the Post on Monday that the low deficit target "seemed too optimistic" compared to forecasts made by independent observers, who mostly projected 2.7 to 2.9 percent GDP.

The disparity, he argued, reflected "significant differences" in growth assumptions, the determining variable in the debt-to-GDP ratio, given that the government's calculations were based on assumed growth of 6 percent.

Josua pointed out that the 2027 proposed deficit nominally increased from 2026, creating a "paradox" because of the government's presumed growth.

Source: https://asianews.network/ambitious-targets-cast-doubt-on-indonesias-prudent-budget-plan