Indonesia: Balancing The Need For Budget Reforms And Maintaining Economic Growth – OpEd
During budget deliberations in Parliament on Tuesday (20/05), Finance Minister Sri Mulyani mentioned that President Prabowo’s budget efficiency and reallocation for strategic programs is going to continue well into 2026.
The government aims to cut state spending and divert the funds into investment for long term projects such as the free meals program (which will increase health outcomes), free schools (improve education) and cheaper housing (improve living conditions). The logic behind the budget cuts is simple, Indonesia needs to “cut the fat” (remove excess spending) and improve its long-term prospects.
Indeed, Indonesia has struggled with the age-old problem of budget effectiveness (efficiency and the impact of public spending). Budget absorption capacity remains low across critical sectors. In 2023, only 76% of infrastructure funds were utilized, delaying strategic projects like the Trans-Sumatra Toll Road and undermining economic connectivity. Similarly, 30% of regional healthcare budgets remain unspent due to procurement bottlenecks, exacerbating disparities in access to medical services.
Budget misallocation remains a significant problem. Fuel subsidies, which consume significant portions of the budget, are mostly enjoyed by the upper middle class. Indonesia has started to shift toward more efficient programs like conditional cash transfers (e.g., PKH), but coverage remains limited compared to models in Brazil or Mexico.
Budget outcomes have also remained poor. Despite allocating around 20% of the budget to education (meeting constitutional mandates), Indonesia’s human capital still lag other countries. Indonesia’s Human Development Index (HDI) is 0.728 (2023), lower than Thailand (0.798) and Malaysia (0.819).
Compounding these issues is the misallocation of resources, exemplified by overlapping social aid programs that create duplication and targeting errors, diluting their impact on poverty reduction. Corruption and leakage further erode spending efficiency, with an estimated IDR 100 trillion lost annually to inflated contracts and rent-seeking activities (KPK, 2023).
However, we should not forget that government expenditure is an important component for the Indonesian economy, accounting for approximately 7-9% of the country’s overall GDP and an important buffer in moderating external shocks.
Government spending plays a pivotal role in driving economic activity, particularly in labour-intensive sectors such as hotels, restaurants, transportation and more importantly the small and medium sized enterprises (SMEs). This spending not only stimulates growth but also generates employment opportunities for lower-income and less-educated citizens, serving as a critical tool for poverty alleviation and inclusive development.
Already, the budget reallocation program has partly contributed (there is also a high base effect due to elections in 2024) to the slowing down of government expenditures. In the 1st quarter of 2025, government spending declined / contract by 1.38%yoy. This contributes to the slowing domestic economy, with total GDP growth in the first quarter of 2025 of just 4.87% year-on-year, weakest pace in three years.
This risks to worsen the labour market and weaken purchasing power, which lead to further weakening of the economy. Government finances will also be impacted, as weaker tax revenues will likely result in larger budget deficits. Further risks include downgrade by international credit rating agencies and subsequent pressure on the financial market.
To mitigate these risks, Indonesia needs to balance the need for reforms and resilient economic growth. It can do so by adopting an incremental fiscal policy framework that maintains high-multiplier expenditures (e.g., infrastructure, social aid, labour intensive sectors) while tightening oversight.
Key priorities include performance-based budgeting (link 30% of ministry budgets to measurable outcomes), improve local government efficiency (tie 20% of DAU/DAK transfers to BPK audits), double down on anti-corruption measures (integrate KPK’s asset-tracking systems with MoF databases to flag irregularities and fast-track laws to confiscate illicit gains) and push for digital transparency (deploy AI tools to detect procurement fraud and publicly track projects via Satu Data Indonesia). In addition, the government should also improve policy communication, which will improve confidence of the private sector to invest and consume.
This approach balances growth-driven spending with the need for reforms, for a better Indonesia.
- This article also appeared in the Jakarta Post
