One of the most pressing issues for the government is weak tax revenue growth. Tax revenue growth was quite small in 2019, lower than previous years, with a significant shortfall from the 2019 target.

The budget deficit is forecast to exceed 2 percent of gross domestic product (GDP) in 2019. Given this backdrop and continuing uncertainty in the economy, the 2020 budget will face increased fiscal risk that could have an adverse impact on the economy.

Fiscal risk could recur, raising the risk of fiscal pressure on the government budget. The pressure could come from government revenue, expenditure or government contingent liability. It is important to assess to what extent the government budget is exposed to fiscal risk and to assess whether the budget is sustainable in the face of those risks.

The fiscal risk for the government budget could derive from several sources but the biggest risk would be from low tax revenue. This is because taxation growth is moving on weak fundamentals. The tax ratio between 2014 and 2018 reached an average of 10.3 percent of GDP, the lowest among emerging economies.

Indonesia has also low tax buoyancy: Ideally, the growth of a country’s nominal GDP has a strong correlation with the growth of its nominal tax revenue, which is usually expressed as “tax buoyancy=1”. But Indonesia’s growth in nominal tax revenue has been well below the growth of nominal GDP. Between 2013 and 2017, the Indonesian tax buoyancy ratio stood at 0.53. This indicates a huge potential of tax revenue that has not been captured by the tax authorities.

Structural imbalance in tax revenue is another source of fiscal risk. The tax return is still dominated by corporate income tax that contributes around 30 percent of the tax revenue. In developed countries, contribution of corporate income tax is around 11 percent. This means tax revenue is beholden to corporate earnings, which in turn are vulnerable to macroeconomic conditions.

To reduce reliance on corporate income tax, the government should strengthen efforts to increase personal income tax, expanding the number of taxpayers. Improvement in taxpayer compliance is a positive sign in efforts to increase the number of taxpayers. As per March 2019, tax returns increased by 7.8 percent to 11.3 million. The use of a digital platform has made it easy for people to prepare and submit their tax returns.

Another source of fiscal risk comes from government tax policy itself. To attract more investment, the government is granting tax incentives, such as a tax reduction and tax holiday. As part of tax reform, the government is also revising tax laws. These policies would put short term pressure on tax revenue. Tax reforms could result in uncertainty, creating differences in interpretation and prolonged tax disputes with taxpayers, creating downward risks on tax revenue.

The spread of digital economy (e-commerce), the increasing use of the online business model at the national level, as well as at the global level, have boosted the growth of a shadow economy, a sector that is hard to tax, as demonstrated by government efforts to grapple with these problems.

As tax revenue is the biggest contributor to state revenue (80 percent), its shortfall risk would have a great impact on the government budget and economy. And unfortunately, as recent development show, its probability to materialize is high.

The Health Care and Social Security Agency (BPJS Kesehatan), which manages Indonesia’s national health insurance (JKN), has been running staggering deficits that poses serious fiscal risk to the government budget. This is because of mismatch between the contribution of participants and actual medical expenses incurred. Indeed, in the 2020 budget presentation, the risk of BPJS financing is considered the highest, higher than probabilities of taxation risk.

The government contingent liability in the form of government guarantee with regard to the debts of state-owned enterprises (SOEs) tasked with accelerating infrastructure programs could also pose a fiscal risk, because if these SOEs default in their debt payments, the government must bear the burden of paying their debts. The fiscal risk from this debt has lower probabilities than tax revenue risk, but has the same impact as tax revenue risk.

The fiscal risk, if materialized, would further reduce government fiscal space, which has been constrained by government policies, such as mandatory spending, subsidies and spending on extraordinary events or emergencies. These would curb budget flexibility to fund other things that would support growth. Mandatory spending for education and health, which have been pegged at 20 percent and 5 percent of the budget, respectively, would be directly affected by the fiscal risk.

On the revenue side, the government should speed up reform at the Taxation Directorate General with information technology and increasing its staff. The government has also started looking into the use of externality correcting taxation (tobacco, green taxes) which is still underutilized. The recent 35 percent price increase for cigarettes is a step in the right direction. Vehicle tax based on CO2 emissions and environment (fuel) tax could be considered proof of government commitment to support the Paris Agreement on lowering greenhouse gases.

On the expenditure side, the government should focus on improving the quality of spending by increasing efficiency and scrapping non-priority spending. But whatever impact fiscal risks have on the budget, spending for various social programs and social protections should be ensured and preserved because the poor should not suffer.

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Commissioner of a publicly listed oil and gas services company, Jakarta

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