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Analysis: Prabowo unveils populist economic stimulus package for 2025

Tenggara Strategics (The Jakarta Post)
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Jakarta
Thu, January 2, 2025

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Analysis: Prabowo unveils populist economic stimulus package for 2025 President Prabowo Subianto (center) and Vice President Gibran Rakabuming Raka (third right) greet Red and White Cabinet ministers before a plenary cabinet meeting at the Presidential Palace in Jakarta on Dec. 2, 2024. (Antara/Sigid Kurniawan)

T

he Prabowo Subianto administration has announced an ambitious economic stimulus package for 2025, aimed at softening the blow of a planned increase in the value-added tax (VAT) rate. The measures target low- and middle-income Indonesians, as well as micro, small, and medium enterprises (MSMEs) and labor-intensive industries, in what analysts view as a populist move to mitigate potential backlash against the tax hike.

The government revealed the package on Dec. 16, 2024, describing it as a comprehensive strategy to shield vulnerable groups from the impact of the VAT increase from 11 percent to 12 percent, as mandated by the Tax Harmonization Law (Law No. 7/2021). The package, which includes a mix of social assistance, tax breaks, and industry incentives, is estimated to cost Rp445.5 trillion (US27.35 billion), double the amount allocated during the COVID-19 pandemic, with VAT discounts alone accounting for Rp265.5 trillion.

Five key measures are designed to assist low-income Indonesians. The government will provide 10 kilograms of rice per month to 16 million households in the lowest income deciles. A 1 percent VAT discount will be applied to essential staples such as wheat flour, refined sugar, and the Trade Ministry’s subsidized cooking oil brand, MINYAKITA, so that the VAT paid by the people for the staples stays at 11 percent. Additionally, a 50 percent discount on electricity tariffs in January-February 2025 will benefit 81.4 million households with power usage under 2,200 volt-amperes (VA).

Middle-income Indonesians will benefit from eight measures. These include a 100 percent VAT discount on homes priced up to Rp5 billion for purchases made from January to June, and a 50 percent discount from July to December 2025. Discounts on VAT and luxury goods tax for electric vehicles (EVs) with varying levels of local content will also be available, alongside exemptions for import duties on completely built-up (CBU) EVs. Hybrid EVs will now enjoy 3 percent luxury goods discount. Workers in labor-intensive industries earning up to Rp10 million monthly will enjoy exemptions from Article 21 income tax. Unemployed individuals will receive severance pay worth 60 percent of their salary for six months, Rp2.4 million in training support, and access to job information and Pre-Employment Card programs. A 50 percent discount on occupational accident insurance premiums for workers in labor-intensive industries is also included.

For MSMEs and labor-intensive industries, the government has introduced three major initiatives. These include an extension of the 0.5 percent Final Income Tax for MSMEs under Government Regulation No. 55/2022, an income tax exemption for MSMEs with annual revenues below Rp500 million, and a 5 percent interest subsidy on loans aimed at revitalizing machinery in labor-intensive industries.

The stimulus package reflects the government’s attempt to balance short-term economic relief with the long-term fiscal burden. While the measures are expected to cushion the effects of the VAT hike on living costs, which has been receiving public backlash, the inclusion of unemployment and workplace safety benefits suggests a potential shift toward more sustainable welfare policies. Analysts note that these policies could evolve into enduring programs with productive impacts on the workforce. By addressing the economic concerns of both individuals and businesses, Prabowo’s populist package demonstrates a bid to secure public support as the administration navigates the challenges of tax reform in 2025.

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