Indonesia’s 2025 Budget: Aiming High

On 16 August 2024, one day before Indonesia’s Independence Day celebration, President Joko Widodo (Jokowi) will present to the House of Representatives the last budget proposal of his two-term presidency.  The budget will be implemented by President-elect Prabowo Subianto’s (Prabowo) government and his team is involved in its formulation. The appointment of Thomas Djiwandono, General Treasurer of the Gerindra Party and also Prabowo’s nephew, as Deputy Minister of Finance ensures that Prabowo’s priorities are incorporated in the 2025 budget. To accommodate the ambitious spending priorities, however, the 2025 budget seeks to raise debt levels as well as up the country’s value-added tax.

The 2025 budget is expected to accommodate Prabowo’s key election promises, such as a free school meal programme, and security-related programmes, such as food estates for food security and self-sufficiency and the country’s military modernisation. It will also include the continuation of Jokowi’s policies and projects, most notably the move to the new capital city (IKN) and various social protection programmes.

The budget is formulated based on several macroeconomic assumptions, which appear conservative. Most parameters closely follow past years’ trends (Table 1). The key metric to watch is the rupiah exchange rate. It has been quite volatile recently, hitting a low of 16,489 to the dollar on 20 June and a high of 15,225 on 1 September 2023. On 14 August, it appreciated to hit a high of 15,676 to the dollar. As we expect more uncertainties going into next year, there is no certainty that it will hit next year’s projection of 15,500-15,900 rupiah to the dollar.   

Table 1: Government Budget Macroeconomic Assumptions

	2023 (Actual)	2024 (Estimate)	2025 (Projection)
Growth	5.05%	5.2%	5.1-5.5%
Inflation	2.6%	2.8%	1.5-3.5%
Rupiah/ US Dollar	15,255	15,000	15,300-15,900
10-year Gov Bond rate	6.68%	6.7%	6.9-7.2%
Global Oil Price	US$ 78.4 p.b.	US$ 82 p.b.	US$ 75-85 p.b.
Domestic Oil Production	605,500 b.p.d.	635,000 b.p.d.	580,000-605,000 b.p.d.
Domestic Gas Production	960,400 b.o.e.	1,033,000 b.o.e.	1,003,000-1,047,000 b.o.e.

Total revenue from taxes, excise duties and state-owned company dividends in 2025 is projected to reach 2,870 trillion rupiah (12.4 per cent of GDP), while total spending is set at 3,518 trillion rupiah (15.2 per cent of GDP) resulting in a budget deficit of 2.8 per cent. This is just below the 3 per cent budget deficit limit. A deficit beyond this limit will require parliamentary approval. Under this scenario, the country’s debt to GDP ratio in 2025 is projected to be at a manageable 38-39 per cent, which is not much different from 2023 and 2024 levels. Nonetheless, to accommodate Prabowo’s development plans, the new government is expected to increase the debt level to 50 per cent, which is still below the 60 per cent limit stipulated under the state financing law.  

Table 2: Government Budget Projections (Rp trillions)

	2023	2024	2025
			lower bound	upper bound
GDP	20,892.4	21,937.0	23,055.8	23,143.6
Revenue	2,778.7	2,698.3	2,789.8	2,869.8
Expenditure	3,113.0	3,202.8	3,366.1	3,517.8
Deficit	334.3	504.6	576.4	648.0
% of GDP	1.6%	2.3%	2.5%	2.8%

While detailed programme allocation is still not publicly available, one can assume that, given the ten per cent rise in budgetary spending in 2025, there is a strong political effort to accommodate Prabowo’s campaign pledges. To keep the deficit below the three per cent limit, the government has set an ambitious target for revenue collection. To fill up some of the financing gap, the government is expected to issue more bonds at higher rates (Table 1).  

At the same time, the limited fiscal space also requires downward adjustment and reassessment as to the scope and timing of the more ambitious programmes. Two of the more controversial programmes are the IKN capital city move and the school lunch programme, which require significant outlays of Rp 466 trillion and Rp 450 trillion, respectively. As of now, more than 80 trillion rupiah has been spent on the IKN project (2022-2024), which is 17 per cent of its total estimated cost.  

The ambitious timetable set by President Jokowi, i.e., to move the government administration and civil servants in September 2024, is not likely to happen on time. Rushing to complete the project has put a strain on the country’s limited budget as well as state-owned contracting companies. Therefore, the government needs to consider a more spread-out timetable, with a staggered move of ministries and civil servants to the new capital, to make it less burdensome to the state budget.

If the total revenue and spending end of the budget can be maintained, the resulting budget deficit and total debt to GDP ratio should still be manageable.

Prabowo’s school meal programme is also expected to be implemented in phases, starting with primary schoolchildren in low-income and deprived communities who need it most. The programme should later be expanded to other locations and older cohorts. For next year, the Ministry of Finance has allocated 71 trillion rupiah to start the programme.

Details of the new government’s food and fuel security programmes have yet to be revealed to the public. However, existing self-sufficiency food and fuel programmes, in the form of large rice-growing estates and bio-diesel produced from crude palm oil (CPO), have not performed well and have increased the deforestation rate.

Given Prabowo’s interest in upgrading Indonesia’s defence capacity, one can assume that his administration will further increase spending on military modernisation. In fact, the Finance Ministry has allocated 156 trillion rupiah rupiah for the Defence Ministry in the 2025 budget, which is quite a significant increase from 134 trillion rupiah for this fiscal year.

Anticipating a rise in spending, the government will raise the value-added tax (VAT) by a percentage point to 12 per cent starting next year. VAT now accounts for about 40 per cent of total tax revenue, so the VAT hike should boost tax revenue, provided consumption can be maintained even with the inflationary impact of VAT’s rise.  

If the total revenue and spending end of the budget can be maintained, the resulting budget deficit and total debt to GDP ratio should still be manageable. This would be critical to maintain investors’ confidence.

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