Indonesia Targets a Leaner Path to Deficit Reduction
As Indonesia’s government debt climbs to Rp9,138.05 trillion by the end of the first semester in 2025, Finance Minister Purbaya Yudhi Sadewa unveiled a multi-pronged strategy aimed at narrowing the budget deficit. The central idea is to empower faster economic growth and boost state revenues through targeted spending, revenue enhancements, and a more disciplined fiscal approach.
Targeted Spending: Hit the Mark Without Leakage
In remarks delivered at the Ministry of Finance, Purbaya stressed that the first pillar of the plan is to spend the budget on target, on time, and with minimal leakage. The goal is to maximize the budget’s impact on the real economy and public services while keeping waste at bay. When implemented effectively, targeted spending can stimulate growth across critical sectors and support improved tax collections as activity broadens.
How Targeted Spending Drives Revenue
Minister Purbaya linked efficient expenditure to a broader tax trajectory. He argued that as the economy accelerates, tax bases widen and compliance improves, leading to higher revenue without raising rates. The logic is simple: growth begets revenue, and stronger activity in the formal sector tends to lift collections from taxes and duties alike.
Raising the Tax Ratio: A Key to Fiscal Health
Another central element of the plan focuses on increasing the tax ratio. Purbaya highlighted efforts to strengthen revenue sectors such as customs duties, Value-Added Tax (Coretax), and other tax streams. He believes that improvements in these areas can meaningfully raise the overall tax ratio and reduce the deficit over time.
Potential Growth and Financial Leverage
The minister is belief-driven but data-informed: if the real sector growth accelerates, the tax ratio could rise by roughly half to one percentage point. With an expected additional state revenue of at least Rp100 trillion, the fiscal balance could improve substantially, provided growth remains resilient and investment momentum stays intact.
Growth as a Catalyst for Fiscal Stability
Purbaya emphasized that the economy must grow faster than in earlier quarters if the deficit is to be brought down meaningfully. He expressed optimism about achieving growth above 5 percent in the current quarter, a pace he described as a potential “blessing” for fiscal consolidation. Such growth would support higher tax receipts and customs revenue, creating room to reduce the deficit while still funding critical public needs.
Debt Levels: A Relative View
According to the Ministry of Finance, the debt ratio stood at 39.86 percent of GDP at mid-2025, a level the government characterized as healthy and manageable relative to many peers. Suminto, the Director General of Financing and Risk Management (DJPPR), noted that the figure remains within safe bounds and highlights Indonesia’s capacity to undertake reform without compromising financial stability.
What This Means for the Road Ahead
Officials say the strategy is not just about shrinking the hole in the budget but also sustaining a growth path that broadens the tax base and improves long-term resilience. By combining disciplined spending with revenue reforms and growth-supportive policies, the government aims to reduce the deficit while preserving essential investments in health, education, and infrastructure.
Analysts will watch how the balance of expenditure control, tax reform, and growth unfolds in the coming quarters. If the plan succeeds, Indonesia could see a widening gap between debt service needs and revenue generation narrow, paving the way for a more stable fiscal trajectory in the medium term.
Editor’s Note: This report draws on statements from Finance Minister Purbaya Yudhi Sadewa and public communications from the Ministry of Finance in Jakarta.
