Squeezed From Both Sides: Prabowo’s Fiscal Reckoning and Governance Implications

When Parliament passed Indonesia’s 2026 State Budget (APBN) in September 2025, it assumed that oil cost USD70 per barrel, the rupiah was exchanged at IDR16,500 per US dollar and that the country’s deficit would be at 2.68 per cent of gross domestic product (GDP). Seven months later, those assumptions have been crushed, as the price of Brent crude has surged past USD100 following the US’ and Israel’s strikes on Iran, while the rupiah has crossed the psychologically important IDR17,000/USD mark. On 13 March 2026, Coordinating Minister for Economic Affairs Airlangga Hartarto presented a ‘moderate’ scenario to the Cabinet where the deficit could breach 3.53 per cent of GDP, past Indonesia’s mandated limit of three per cent.

In October 2024, President Prabowo Subianto came into office with grand promises. His three signature programmes are expensive ones, and his political stance until now has been to never trim their budget allocations. The free nutritious meals (Makan Bergizi Gratis, MBG) scheme has disbursed IDR44 trillion as of March 2026. Meanwhile, his ‘red-and-white’ cooperatives (Koperasi Desa Merah Putih, KDMP) programme, less visible but more politically ambitious, has established more than 80,000 village cooperatives since mid-2025. Each cooperative is eligible for up to IDR3 billion in subsidised state-bank credit; if fully drawn, the state’s liability could approach IDR240 trillion. Finally, 150 of the planned 500 Territorial Development Battalions, or military units deployed for civilian governance, food logistics and healthcare, are operational. On top of this, the state has committed to allocating IDR210.1 trillion for energy subsidies, 17 per cent higher than in 2025.

Each programme has its logic. The MBG programme theoretically addresses child malnutrition; the KDMP targets middlemen who have long extracted value from Indonesian farmers; the battalions are Prabowo’s remedy for slow civilian bureaucracy captured by local interests, to deliver development; and energy subsidies are for sustaining Indonesians’ purchasing power.

The problem is that this combination of large, expensive policy programmes and the administration’s tightening fiscal space had stretched the state budget even before the current spikes in oil prices and exchange rates post-Iran war.

The fiscal numbers are worrying: by end-January 2026, the annual state budget was in deficit by IDR54.6 trillion (up 127 per cent year-on-year). A month later, it reached IDR135.7 trillion, a 342 per cent increase over the first two months of 2025: spending grew 41.9 per cent year-on-year, but revenues grew much more slowly, partly due to lagging tax collections. The Finance Ministry has claimed that this is all by design, that the government had an ‘early spending’ strategy to support growth in a difficult environment. However, the government had also committed IDR599.4 trillion to pay its debt interest in 2026, 13 per cent higher than last year, before a single rupiah can be spent.

In addition to off-budget financing, mostly by state-owned enterprises (SOEs), Indonesia’s debt-to-GDP ratio is around 40 per cent, well within the mandated 60 per cent ceiling. However, the more important measure is Indonesia’s debt service ratio (DSR) because it services its debt not with GDP but with actual state revenue. The DSR numbers are worrying. A decade ago (under Joko Widodo’s administration), Indonesia’s DSR was around 23.9 per cent. By 2024, it had reached 42.3 per cent, meaning that for every IDR100 in state revenue, IDR42 went toward debt payment. Projections for 2025 were around 45 per cent, but for 2026, this has already exceeded 47 per cent. The international safe threshold is 25 to 30 per cent, and Indonesia has hovered above it for years – at the point where debt no longer supports but constrains growth, otherwise called a debt overhang.

President Prabowo faces a tough combination of an internal, structural fiscal problem crashing into external shocks, even before he can properly deliver on his promised priority programmes in his presidency’s second year.

To reverse this, Indonesia needs to increase tax revenue, but this would be an unpopular choice for Prabowo, who postponed a planned value-added tax (VAT) increase in 2025. In practice, his administration’s fiscal room for manoeuvre is very narrow. The three per cent deficit ceiling is unlikely to accommodate his signature programmes plus energy subsidies, infrastructure development and regional transfers. The government’s own calculation shows that every USD1 increase in Brent crude’s price will add IDR10.3 trillion in spending but generate only IDR3.5 trillion in additional revenue (resulting in IDR6.8 trillion nett extra spending). This means,  with current oil prices about USD30 higher per barrel than the APBN’s assumptions, there will be at least IDR204 trillion in additional spending even before the rupiah’s depreciation is considered.

The Prabowo government’s choices in this uncertain time are all painful ones. The government has announced that it will limit fuel use, cut public servants’ travel and have them work from home one day a week, to save IDR243 trillion. What is more fundamental for protecting fiscal space is to cut fuel and energy subsidies, but this will impact millions of lower-income Indonesians suffering higher transport and energy costs – a risk Prabowo seems unwilling to take.

While the president can offer targeted cash transfers for poorer citizens to cushion the impact, this might be seen as politically more difficult, as infrastructure development has already been deferred since 2025. Earlier, Prabowo did not want to scale down his MBG programme despite demands, but he has made a small concession, trimming meals by a day each week. He is continuing with the KDMP programme, which means he would have to either breach the three per cent deficit ceiling or suspend it by regulation, as Widodo did during the COVID-19 pandemic. This could further dent Indonesia’s sovereign credibility and ratings; Moody’s and Fitch have already revised their outlook to negative in early 2026.

The governance consequences extend beyond budget and fiscal technicalities. When forced to choose between fiscal credibility and political promises, the president is likely to retreat to the defensive. For instance, he has the discretion to cut budgets across the board or reduce transparency, controlling government communications to block out bad news. Decision-making may become more centralised, as programme adjustments become too politically sensitive to delegate. When questioned by civil society or economists, the administration might use more repression to silent dissent. This could further erode trust because democratic accountability demands that the government be open about the trade-offs it is making.

President Prabowo faces a tough combination of an internal, structural fiscal problem crashing into external shocks, even before he can properly deliver on his promised priority programmes in his presidency’s second year. He can decide whether to ‘waste’ this crisis or to use it to make some fundamental reforms in fiscal policy and governance.

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