The 2021 State Budget Law targeted Indonesia’s economic growth to rebound to 5 percent next year, Finance Minister Sri Mulyani Indrawati said on Tuesday. This will follow an expected economic contraction of 0.6 to 1.7 percent this year, the first since the 1998 Asian financial crisis.

“Economic growth in 2021 will be driven by gradual recovery in domestic consumption and we will push government spending to maintain people’s purchasing power amid the new normal,” she said. Controlling the pandemic will be the key factor to ensure growth, Sri Mulyani added.

“Investment will grow next year because of the base effect and an increase in development programs, while exports and imports will rise in line with global economic recovery.”

The government will prepare Rp 2.75 quadrillion  (US$185.19 billion) in state expenditure to fuel the virus-battered economy next year. It will continue its development programs as it looks to raise Rp 1.74 quadrillion in state income to fund spending on infrastructure, health care and stimulus, among other things.

On that basis, the state budget deficit is expected to reach Rp 1 quadrillion, or 5.7 percent of GDP, lower than the estimated 6.34 percent of GDP this year as the government will slightly cut its spending while at the same time slightly increasing revenue from taxes.

Uncertainty lingers

The government and the House have agreed that the economic growth target will be set at 5 percent, which revises the initial estimate of 4.5 to 5.5 percent, as they expect economic activity to normalize next year despite the uncertainty surrounding the pandemic.

“We expect that some uncertainty will remain next year […] the risk of uncertainty would need to be managed carefully to mitigate the negative impacts so that public health and the economy could recover.”

The law will include a clause that will allow economic growth to be at a maximum 3 percent below the current target to account for the uncertainty surrounding the coronavirus pandemic, according to House budget committee chairman Said Abdullah on Friday.

The government’s economic growth is not realistic as the pandemic uncertainty will continue next year, according to CIMB Niaga chief economist Adrian Panggabean.

“It is going to be a partial rebound given all policy circumstances and inertia. Our estimate is that 2021 economic growth will be around 4 percent,” he told The Jakarta Post.

Meanwhile, the World Bank projects that Indonesia’s economy will grow 3 to 4.4 percent next year due to the base effect, which means that the level of GDP in 2020 is very low, according to World Bank acting lead economist for Indonesia Ralph van Doorn.

“We project there will be a slow and protracted recovery. This is predicated on the scenario of a gradual global economic recovery increasing external demand for Indonesia, and a gradual increase in domestic demand,” Van Doorn told the Post on Tuesday.

Banking on tax reform

The government expects to collect Rp 1.44 quadrillion in taxation revenue next year, including Rp 1.22 quadrillion in tax income and Rp 214.9 trillion in customs and excise revenue.

“We will accelerate tax reform, widen our tax base, improve tax administration and put more goods into excise such as sweet drinks, among other things,” Sri Mulyani told reporters in a press briefing. “But we must be careful to collect taxes to avoid putting additional pressure on businesses.”

The tax office will introduce new policies next year, such as charging tax on e-commerce, intensifying tax surveillance and extending the individual and regional tax basis, continuing customs facility development and harmonizing fiscal incentives across ministries.

This year, the government obliged technology giants that have a significant presence in Indonesia to be value added tax (VAT) collectors amid plunging tax collection due to virus-battered economic activity.

Van Doorn said the government would need to restore tax revenue to bring the budget deficit to below 3 percent of GDP, adding that significant expenditure and lower revenue may leave an indebted government less equipped to invest in infrastructure and growth.

“It is important for the government to restore tax revenue and increase it to the emerging market level, which is double the amount Indonesia collects in normal times,” he went on to say. “Otherwise fiscal consolidation to below a 3 percent deficit will be done through reducing state expenditure, which would be the low-quality way of getting it back to pre-pandemic levels.”

Continued spending in priority sectors

The government is looking to spend Rp 1.95 quadrillion next year, up Rp 3 trillion from the initial estimate, in some priority sectors including education, health care, infrastructure, social protection programs and information and communications technology, among other sectors. The government will also spend Rp 795.4 trillion in direct regional transfers and village funds.

The government has allocated Rp 169.7 trillion for health care, including to procure coronavirus vaccines and to strengthen disease prevention, among other things, while also allocating Rp 550 trillion, 20 percent of the budget, to improve the country’s education system.

The government will continue with spending in priority sectors including Rp 413.8 trillion for infrastructure, Rp 15.7 trillion for tourism development, Rp 104.2 trillion to build food resiliency and Rp 29.6 trillion for information and communication technology (ICT) development, among other allocations, Sri Mulyani said.

Furthermore, the government is planning to spend Rp 373.2 trillion on debt interest payment next year, more than 10 percent of the government’s budget.

‘Burden to sustainability, resilience of state budget’

The government will continue to keep the budget deficit above the generally applicable legal limit of 3 percent next year, as it seeks to kick-start the sluggish economy. The government is planning to bring back the deficit to below 3 percent of GDP by 2023.

“Extraordinary fiscal support to mitigate the pandemic and its social and economic impacts will put a huge burden on the sustainability and resilience of the state budget,” Sri Mulyani said, adding that the government would conduct fiscal consolidation in the long run to maintain macroeconomic stability.

The coronavirus pandemic necessitated record amounts of government borrowing as it will raise the debt-to-GDP ratio to 40 percent next year, up from 29.8 percent last year.

“It is not only the debt stock, at 40 percent of GDP, which is starting to be alarming. Debt servicing cost is also going to be a serious concern as it will take 12.5 percent of the budget,” Adrian went on to say. “Development financing by the government needs a new strategy going forward.”

The government, Sri Mulyani said recently, would continue to work with Bank Indonesia (BI) and allow the central bank to buy government bonds directly at auction as a standby buyer.

The government and the central bank have agreed on a $40 billion debt monetization scheme, dubbed “burden sharing”, which will see BI buying government bonds worth at least $28 billion.