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.

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