As the outlook of the country’s tax revenue remains hazy, the government faces a dilemmatic question on whether it needs to boost spending to push the economy, as it should defend the state budget against the backdrop of global risks.

Although still relying heavily on household consumption, which accounts for more than 50 percent of its gross domestic product (GDP), the country needs government spending as a main driver for growth that can create multiplier effects, such as through infrastructure development.

However, government expenditures may not play a significant role in boosting growth this year, as the government wants to maintain a “credible” state budget through a manageable deficit, set at 2.41 percent, trying to be prudent so as to keep it below the legal limit of 3 percent.

Finance Minister Sri Mulyani Indrawati acknowledged growing pessimism in relation to state revenue, as the government would need arduous efforts to boost tax revenue, while at the same time, global risks could pose challenges for the country’s economy and continue affecting overall tax revenues.

She insisted, however, that the current state budget had been designed to be “credible,” meaning that the government aimed to be as accurate as possible in allocating spending and the tax revenue target.

“Every cent of spending is a commitment, while revenue is an estimate. Both the government and lawmakers know our ability in making accurate projections for state revenue, so that the uncertainty in the budget would not be too big,” she told lawmakers and the audience during an event held by the Golkar Party on Monday.

The government fears aggressive spending will mismatch with its tax revenue target following last year’s disappointing result — in which routine tax revenue realization declined 4.8 percent assuming the penalties
obtained from the tax amnesty are excluded.

With penalties from the tax amnesty included, tax revenue realization grew 3.5 percent last year, a far cry compared to the targeted 18 percent growth this year to Rp 1.31 quadrillion (US$98.08 billion).

Sri Mulyani reminded lawmakers that managing safety in the state budget was essential amid rising global uncertainty, which will get more intense owing to Greece’s debt issues, pointing out major European countries involved such as Germany, France and the Netherlands were leaning toward populism.

“If we see a bleak tendency in the global economy, Indonesia can hope that its tax revenues will rely on reforms in the Directorate General of Taxation and customs and excise, in which we improve their institutions, human resources, business process and information technology,” she said.

Businesspeople have said they had no issue with the government’s efforts to boost tax revenues, but the country’s high income tax (PPh) rates compared to its neighbors are seen as discouraging for companies to improve their tax compliance.

“High tax rates can serve as a disincentive for people to comply with the tax obligation,” said Indonesian Employers Association (Apindo) chairman Hariyadi Sukamdani.

Indonesia sets an income tax rate at 28 percent for institutional taxpayers, higher than the range of 10 to 16 percent set by its neighboring country Singapore. The government has voiced the idea of reducing the rate to 17 percent, but such a move would require law amendment.

The House of Representative’s Commission XI, which oversees fiscal and financial issues, has said this year’s priority deliberation would focus on fiscal-related bills, which include, among others, revisions to laws on income tax and the general taxation system (KUP).

Indonesia’s overall GDP expanded 5.02 percent last year, lower than the expected 5.2 percent, prompting worries that the country may not have much wiggle room to push the economy by 5.1 percent, as the government had targeted this year.

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