Last week Indonesian President Joko “Jokowi” Widodo unveiled the country’s proposed budget for 2023. We knew that it was probably going to be smaller than in previous years when the government had to run big deficits to stimulate the economy and shore up the healthcare system. The question was, with the pandemic receding and inflation on the rise, how much smaller? And the answer is, not that much.
At IDR 3,042 trillion (roughly $204 billion), overall spending is set to decrease by just 4 percent from the previous year’s record high. The government plans to spend nearly 32 percent more than it did in 2019 which was the last full year before the pandemic. And yet, even with expectations that the price of oil will remain near $100 a barrel, planners believe the budget deficit – which exceeded 6 percent of GDP in 2020 – will fall to below 3 percent for the first time since the pandemic.
If everything goes according to plan, this is going to be accomplished mainly on the revenue side, as the economy is expected to grow by 5 percent or more in 2023. With businesses finding their feet and consumers spending more, in tandem with improved collection, tax revenue is projected to increase by 30 percent from pre-pandemic levels. Recent bumps in the consumption tax and the excise tax on cigarettes should help out here as well.
On the spending side, government outlays in the healthcare sector are expected to take a big hit, contracting by 20 percent compared to this year and 45.6 percent from their 2021 highs. This might be unfavorably contrasted with the fact that public spending in some other areas (including for controversial items like the new capital city project) is set to increase a bit. But we should be careful with such comparisons since spending on healthcare was inflated during the pandemic and it would be unreasonable to expect it to remain at those levels indefinitely.
A better point of comparison is 2019, in which case overall spending on healthcare – even after falling the last two years – is still up 49 percent. The argument can certainly be made that the allocation of resources in this budget could be optimized better, but this is still a relatively generous budget across the board, especially as compared to a pre-pandemic baseline.
The real budget buster on the spending side can be found, not surprisingly, in energy subsidies. The Indonesian government has always been generous with subsidies, especially for cooking gas, gasoline, and electricity. This is one reason inflation in Indonesia has remained fairly moderate compared to other places around the globe. But it comes at a price, and that price has gotten steeper as energy imports have grown more expensive.
If the assumptions in the budget hold, energy subsidies for 2022 will hit 209 trillion ($14 billion), which is a 53 percent increase from 2019. Planners believe that these subsidies will be slightly higher next year. Ballooning energy subsidies have been partially offset this year by Indonesia’s red hot commodity exports, like coal and palm oil, which drove up revenue from export duties. But with cooling global demand, the Ministry of Finance does not believe that windfalls will reoccur in 2023.
While they are expecting to make up some of the difference through increased tax revenue, the government’s commitment to insulating Indonesian consumers from high gas prices through generous subsidies will be put to the test. This is probably a good thing in the long-run, as it provides political cover to do an unpopular thing (reform and/or reduce subsidies) that is actually good public policy. If they can work out a method for targeting these subsidies better, this situation could end up being a net benefit for the economy and the state’s finances.
Another drag on expenditures is the cost of servicing debt. Interest payments on the national debt are expected to be 60 percent higher in 2023 than they were in 2019, which is partially a function of the massive deficit-spending the state did during the pandemic. Some might point to this as evidence of government profligacy, but the alternative would likely have been much worse. In any case, thanks to Indonesia’s current account surplus and its shrinking fiscal deficit the debt burden remains manageable for now.
All things considered, economic indicators in Indonesia are pretty good and that is reflected in the confidence of this budget which features aggressive assumptions about growth and revenue. The accuracy of those projections will be key, as the government’s spending plans have only been modestly scaled down. With the deficit projected to shrink while tax revenues increase, the biggest issue for policymakers to grapple with in 2023 may end up being how best to leverage high energy prices into unpopular but necessary subsidy reforms.