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Indonesia's budget deficit to stay wide as tax reforms held back

Bloomberg News - July 8, 2021

Claire Jiao, Grace Sihombing and Haslinda Amin – Indonesia's finance minister expects the budget deficit to stay elevated next year as the nation's worst coronavirus surge hampers the recovery and efforts to boost state revenue.

The fiscal shortfall could reach 4.7%-4.8% of gross domestic product in 2022, Finance Minister Sri Mulyani Indrawati told Bloomberg Television's Haslinda Amin. That's near the top end of the government's 4.5%-4.85% projection.

"We'll try very hard to return to fiscal discipline in 2023. But at the same time, we'll also be very pragmatic," Indrawati said. "All countries make plans, but Covid will not follow the plan."

Indonesia has pledged to return its deficit to below the legal limit of 3% in 2023, from 5.7% expected this year, after boosting state spending last year to support the pandemic-battered economy. The country joins neighbors including Malaysia and Thailand whose hopes of an economic turnaround have been dashed by fresh waves of infections that have required new lockdowns and restrictions.

The government expects the economy to grow 3.7%-4.5% this year, a downgrade from earlier forecasts for 4.5%-5.3% growth.

The fragile pace of recovery is prompting a rethink of a tax-reform proposal that aims to boost revenue. The government could push back planned tax hikes and issue more measures to help struggling companies, Indrawati said. Non-priority spending will be scrapped to carve out space in the budget, she added.

"Less controversial" taxes can be immediately implemented, but "some measures that are against recovery" could be pushed back to the middle or end of 2022, Indrawati said. For example, the government needs to ensure the planned overhaul of value-added taxes will be equitable and fair, despite concerns that it could fuel inflation.

"We will look at whether the Indonesian economy is strong enough," to bear the tax changes, she said.

Market discipline

Regardless of how fast Indonesia can rein in its budget deficit, the Finance Ministry won't seek more help from Bank Indonesia to fund the shortfall, Indrawati said. Strong demand at bond auctions since May has given the central bank reprieve from buying government bonds, even as it remains a standby buyer through next year if auctions falter.

Instead, Indrawati is working with the central bank and Financial Services Authority to relax regulations and extend guarantees for working capital as business groups warn of layoffs and bankruptcies amid virus curbs. While the government wants to provide all possible support, it needs to be sure the help goes to the right sectors, she said.

"We're going to continue doing what we call 'good market discipline,'" Indrawati said, adding that bondholders and credit-rating companies are encouraged by Indonesia's fiscal prudence and structural reforms.

Source: https://www.bnnbloomberg.ca/indonesia-s-budget-deficit-to-stay-wide-as-tax-reforms-held-back-1.162648