What Indonesia’s 2025 budget tells us about Prabowo’s budget prospects

As one of his last acts before leaving office, Indonesian President Joko ‘Jokowi’ Widodo signed the law national budget for 2025. This budget is worth taking a close look at, because although it was developed and adopted during the Jokowi administration, it will be implemented by his successor Prabowo Subianto and gives us a first glimpse of how fiscal policy will be handled under the new president will be executed.

Prabowo shocked markets Last year by suggesting that he wanted to push the economy to annual growth of 8 percent and was willing to run large budget deficits to do so. In addition to a widespread claim during the campaign of a $30 billion free lunch program, there was some concern that Prabowo would abandon budget discipline in pursuing budget-busting projects.

Indonesia remains committed to major spending on social services, Prabowo’s child nutrition program, and infrastructure. After Prabowo’s inauguration, the government was also restructured in such a way that a number of new ministries and posts were created, all of which are now competing for budgetary resources. Can the budget meet the spending priorities of Prabowo and the enlarged government while keeping the deficit manageable? The short answer is: yes.

The first thing you notice when you look at the 2025 budget is that the fear of uncontrolled spending is largely exaggerated. In fact, the 2025 budget maintains strong continuity with other Jokowi-era budgets in key respects. By law, Indonesia cannot have a deficit of more than 3 percent of GDP in any given year. The 2025 budget projects a deficit of 2.53 percent of GDP, which is well below the legal limit and very much in line with the kind of deficits Jokowi ran for most of his presidency.

Prabowo’s children’s nutrition program is moving forwardbut with a price tag of $4 billion, it will cost significantly less than $30 billion, a figure that never made sense to begin with. There are legitimate questions about how effectively this program is designed and implemented, but given the overall state of Indonesia’s balance sheet, spending $4 billion on child nutrition is unlikely to place undue pressure on public finances. For a sense of scale, total spending for 2025 is set at approximately $226 billion.

To make room for these new priorities, other expenses are being cut. It is clear that some kind of fuel subsidy reform is on the way. The cost of government subsidies (both energy and non-energy) has skyrocketed since the pandemic and is expected to reach $19.4 billion by 2024. The 2025 budget foresees a 1.9 percent decrease in subsidies to $19 billion. This is still a significant amount, but it indicates that government generosity is not unlimited and that political will is gathering to try to better target subsidies. If done correctly, this will free up spending for other priorities.

Another option to increase spending without running large deficits is to raise taxes. A somewhat underreported story in Indonesia is that Jokowi and Finance Minister Sri Mulyani have implemented several tax reforms that have really helped increase revenues and strengthen the country’s fiscal position.

As part of these efforts, a planned VAT increase was due to kick in on January 1, with the government predicting tax revenues would grow by 7 percent in 2025. At the last minute, the VAT increase was scaled back with unknown consequences for government revenues. However, Indonesian budget planners have a pretty good track record on revenue forecasting, so it probably won’t have a huge impact.

The most important thing when it comes to Indonesia’s ability to increase spending while keeping the deficit under control is not the VAT hike or the child feeding program. It is that the economy must continue to grow at or around the recent pace of 5 percent per year. For the time being, the budget for 2025 is based on the assumption that economic growth will be 5 percent (and not 8 percent). As long as it does this, Indonesia should be able to comfortably fund its spending plans, even if the country has to take on new debt to pay for them.

This is why deficits are typically measured as a percentage of GDP and not in absolute terms. They are a function of the government’s ability to make obligations relative to national economic output. As the economy grows, so does the purchasing power of the state, and Jokowi left Prabowo here in fairly good shape. Taking hasty measures that could rock the boat (such as breaking the 3 percent deficit limit when the capital markets have indicated that they will not look kindly on it) seems quite unlikely.