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View all search resultsBreak the straitjacket: Why Indonesia must raise its fiscal ceiling to 5 percent
Twenty-two years on the three-percent budget deficit cap has become a self defeating constraint.
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A plane of the Indonesian Air Force's Jupiter aerobatic team flies past during a parade held on Oct. 5, 2025, as part of celebrations marking the 80th anniversary of the Indonesian Military (TNI) next to the National Monument (Monas) at Merdeka Square in Jakarta. (AFP/Aditya Irawan)
I
ndonesia is a maritime civilization that has forgotten it lives at sea. Stretching across 17,000 islands, commanding the Malacca, Sunda and Lombok Straits and straddling the principal chokepoints of Indo-Pacific trade, the Republic sits at one of the most strategically consequential addresses on earth.
And yet, in the year 2025, Jakarta spent less than 1 percent of its GDP on defense, a figure so negligible it barely registers against the military build-ups accelerating on every horizon.
In such circumstances, Indonesia cannot afford nonchalance. Nor, under its current fiscal rules, can it afford much else.
At the heart of the country’s strategic predicament lies a statutory straitjacket. Law No. 17/2003, caps the annual budget deficit at three percent of GDP. Enacted in the aftermath of the 1997–1998 financial crisis, when Indonesia’s debt stood at 89 percent of GDP and the IMF was virtually writing the country’s budget, the rule was possibly justified. 22 years on, with debt at a comfortable 39–40 percent of GDP, investment-grade ratings secured from every major agency, with the exception of the engineered downgrade last month, that same rule has become a self defeating constraint.
The case for raising the acceptable deficit ceiling to 4.5–5 percent is not a counsel of profligacy. It is a call for strategic and developmental realism. There are two underlying reasons. First there are the investment requirements of Indonesia Emas till 2045. Second and just as compelling is the argument related to maritime security.
The Indonesia Emas vision requires average annual GDP growth of 6.5–7 percent over 20 years. Bappenas estimates the annual public investment shortfall at US$52–58 billion, across transport, energy, education, health and digital infrastructure, simply to remain on the convergence trajectory the National Long-Term Development Plan (RPJPN) maps out.
Indonesia’s current public investment to GDP ratio of 4.9 percent will just not be enough to close this gap. The ADB estimates that comparable structural transformations in East and Southeast Asian peer economies required sustained public investment of 7–9 percent of GDP. Indonesia could reach such higher levels of public investment to GDP level but a 3 percent deficit ceiling stands in the way.
