Alfida Rizky Febrianna, Jakarta – The Economic and Social Research Institute (LPEM) at the University of Indonesia's Faculty of Economics and Business (FEB UI) has reported a troubling decline in Indonesia's middle class, attributed to decreasing purchasing power.
According to LPEM FEB UI's Indonesia Economic Outlook 2024 for Q3 2024, the middle class has shrunk by over 8.5 million individuals since 2018, leaving about 52 million people, or 18.8 percent of the population, in this category as of 2023.
This contraction mirrors a broader trend of economic instability, with more people slipping into the at-risk category. Additionally, the middle class's share of consumption has dropped by 41.9 percent since 2018, reflecting a significant decrease in their spending power.
"This decline in purchasing power is concerning as it undermines aggregate consumption, a key driver of Indonesia's economic growth," the report warns.
The middle class plays a crucial role in national revenue, contributing 50.7 percent of tax income, while the emerging middle class adds 34.5 percent. A drop in their purchasing power could push more individuals into the at-risk category, diminishing their tax contributions and increasing reliance on government support.
This shift could place additional financial strain on the government, potentially requiring increased public spending on subsidies. It may also affect the tax-to-GDP ratio, complicating efforts to achieve fiscal sustainability and maintain economic growth.
In its goal to become a high-income country by 2045, the Indonesian government aims to increase the middle-class population to 80 percent, up from the current 20 percent.
World Bank data shows that the Indonesian middle class has been expanding faster than other groups, with at least 52 million economically secure Indonesians, or one in every five people.
Historically, the Indonesian middle class has driven economic growth, with consumption growing 12 percent annually since 2002, now accounting for nearly half of all household consumption in the country. Over the past two decades, many poor and vulnerable individuals have transitioned out of poverty into the aspiring middle class, which currently includes approximately 115 million people.