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Analysis: Prabowo to increase tax ratio, state budget deficit

Jakarta Post - March 20, 2024

Tenggara Strategics, Jakarta – Defense minister and presumptive president-elect Prabowo Subianto attended the Mandiri Investment Forum 2024 as keynote speaker last week, a role that would normally be performed by President Joko "Jokowi" Widodo. The keynote speech that ran for over an hour, discussed a litany of topics, ranging from the messiness of democracy in Indonesia to the country's extremely low tax ratio and the low contribution of government spending to GDP.

The stance of defense minister Prabowo towards expanding the tax ratio comes to no surprise as that was one of his stated goals during his presidential campaign. Should the defense minister become president, he plans to launch expansive free lunch and milk programs followed with policy-led initiatives to reach food, water and energy self-sufficiency, an expansion to universal healthcare services and more. Each of these programs would require a massive budget, but altogether it would demand a complete revamp of the state budget's revenue stream and cash flow.

Nevertheless, OECD data backs the statement that Indonesia has an extremely low tax ratio. In 2021, Indonesia had one of the lowest tax ratios in Southeast Asia at 10.87 percent. In comparison, other prominent Southeast Asian economies such as Thailand and the Phillipines had tax rates of 16.41 and 18.06 percent respectively in the same period.

This low tax ratio means that the government's capacity to perform its duties is poor in comparison to the relative size of the country's economy, which is reflected in government spending contribution to GDP. Defense minister Prabowo mentions in his speech that Indonesia's government expenditure to GDP ratio is one of the lowest in the world, only 15.5 percent.

While the current administration has started launching a number of initiatives to boost the tax ratio, such as the harmonized tax (HPP) law, defense minister Prabowo unveiled a proposal in his keynote speech to increase the limit for state budget deficit above 3 percent, an announcement that went viral.

Indonesia had been maintaining a budget deficit below 3 percent since even before President Jokowi took office to ensure that debts and accrued interests payable remain manageable. The budget deficit limit was raised temporarily during the COVID-19 pandemic era, due to the drop in economic productivity, requiring fiscal policies to stabilize the economy. Meanwhile, bringing Indonesia's budget deficit for 2023 down to 2.84 percent, from 3.92 percent in 2022 and 4.57 percent in 2021 respectively, was a considerable achievement.

As a natural result of keeping accrued debt under control, Indonesia also has one of the lowest debt to GDP ratios in the world, reaching only 38.6 percent by the end of 2023. Even throughout the pandemic period that devastated many countries with accrued debt, Indonesia's debt to GDP ratio peaked at 41 percent in 2021 during the pandemic, still far below the safe limit of 60 percent debt to GDP ratio stipulated in Law no. 17/2003 on national finance.

What's more

While part of the current administration's initiatives, the upcoming increase to value-added taxes (VAT) as stipulated in the HPP law would be a boon for the upcoming administration should Prabowo Subianto take the office. Effective on Jan. 1, 2025, the government will be raising the VAT rate by 1 percent, from 11 percent to 12 percent.

On one hand, increasing the VAT had improved the government's tax revenues in the past two years since its implementation. In 2023, Finance Ministry data showed that tax revenue from VAT and luxury taxes (PPnBM) reached Rp 764.34 trilion, an increase of 11.16 percent year-on-year (yoy).

On the other hand, the increase to VAT rates would be a sharp blow to consumer confidence right as they were recovering thanks to the aggressive social assistance programs that led up to the general election.

The social assistance programs were believed to have positively impacted consumer confidence to a significant degree. According to (Bank Indonesia) BI data, all expenditure classes except those with expenditures less than Rp 2 million a month expressed higher consumer confidence indices (IKK) from the final quarter of 2023 to 2024, coinciding with the social assistance programs. The significance of this increase is further compounded as the country was undergoing heavy El Nino phenomenon throughout 2023 that led to poor crop harvests and a subsequent spike to food costs.

Meanwhile, a rise in taxes correlates with decreases in consumer confidence due to inflating goods and services cost. A decrease to consumer confidence risks proportionally greater decreases to consumption as the consumer's propensity to save increases to prepare themselves for rainy days, especially when prices are up.

What we've heard

The Mandiri Investment Forum is normally attended by President Jokowi, who also delivers the keynote speech. However, at this year's forum, instead of President Jokowi, Minister of Defense Prabowo Subianto was present. The presence of the Minister of Defense was questioned because his role is not directly related to investment. Meanwhile, the Minister of Investment, who should have been most relevant to the forum, was absent. In the previous year's event, the Minister of Investment was a speaker, and there was even a special day titled "Investment Day" in collaboration between Bank Mandiri and the Ministry of Investment/Indonesia Investment Coordinating Board (BKPM).

The content of the Minister of Defense's speech at the forum turned out to be unrelated to defense or investment, but rather about his future presidential goals. In his lengthy speech lasting over an hour, he mentioned that it was his first time attending the forum and it was upon the instruction of his superior, President Jokowi. He emphasized the importance of continuing the current government's successful programs and elaborated on the programs he aims to achieve and how to achieve them, including increasing the tax to GDP ratio to 16% and reducing the budget deficit to 2.8%.

Prabowo's presence at the event attracted attention due to its timing. The event took place on March 5, while the General Election Commission (KPU) would officially announce the election winner on March 20. Nevertheless, from the preliminary vote count, it was almost certain that Prabowo would win the election due to the significant gap between Prabowo and other candidates. In his speech, Prabowo mentioned that he would likely be inaugurated in October 2024.

During the early promotion period of the Mandiri Investment Forum event, one to two months before the event, Prabowo's name was not listed as a speaker on the flyers distributed. Only one day before the event, Bank Mandiri released a flyer including Prabowo's photo and name as the keynote speaker. In the event rundown, Prabowo was allocated only 20 minutes of speaking time, although his speech ultimately exceeded 1 hour.

A source stated that Prabowo's presence at the event was not planned from the beginning but was decided a few days before the event, after the preliminary vote count indicated that Prabowo would emerge as the election winner. Additionally, the source mentioned that Prabowo's presence did not replace President Jokowi at the event. Both President Jokowi and Prabowo were invited, but President Jokowi had other commitments, so only Prabowo attended.

[This content is provided by Tenggara Strategics in collaboration with The Jakarta Post to serve the latest comprehensive and reliable analysis on Indonesia's political and business landscape.]

Source: https://www.thejakartapost.com/opinion/2024/03/20/analysis-prabowo-to-increase-tax-ratio-state-budget-deficit.htm