Alfida Rizki Febrianna, Jakarta – The government's plan to increase the Value-Added Tax (VAT) from 11 percent to 12 percent in January is expected to further reduce Indonesia's middle-class population, which has already been shrinking since 2018 due to weakened purchasing power.

According to the Indonesia Economic Outlook 2024 report from the Institute for Economic and Social Research, Faculty of Economics and Business, University of Indonesia (LPEM FEB UI), the VAT hike will significantly impact both the middle-class and low-income groups, deepening the contraction in their spending ability.

LPEM FEB UI researcher Jahen F. Rezki warned that the VAT increase could push more individuals into lower income categories. "We haven't calculated how many middle-class citizens might drop a class by 2025, but it's clear that the middle class and the poor will bear the greatest impact from the VAT hike," he said during a Beritasatu Special The Forum discussion on Tuesday.

Since 2018, the number of middle-class citizens has decreased by over 8.5 million, with the middle class now comprising only 52 million people – roughly 18.8 percent of the population. This decline is largely due to reduced consumption driven by diminishing purchasing power.

"The middle class will cut back on the quality of their spending, as a larger portion of their income is now spent on basic needs," Jahen explained, stating that the VAT increase will only exacerbate the situation.

The middle class, which contributes about 50.7 percent of Indonesia's total tax revenue, plays a vital role in the economy. However, if their purchasing power continues to weaken, they may fall into the "potential middle class" or vulnerable groups, further decreasing their contribution to national revenue and increasing their reliance on subsidies.

"If their purchasing power continues to decline, they may be forced into vulnerable groups, reducing their role as tax contributors and increasing their reliance on fiscal support," the report stated.

This shift could strain government finances, as reduced tax revenues from the middle class may force increased public spending or higher subsidies, worsening the tax-to-GDP ratio and challenging fiscal sustainability.

Source: https://jakartaglobe.id/news/vat-hike-threatens-to-shrink-indonesias-middle-class-furthe