Fiscal Balance in Indonesia

Indonesia - Fiscal Balance

Government announces loose 2021 budget in a bid to nurture economic recovery

On 14 August President Joko Widodo revealed the government’s draft 2021 budget. Public spending is seen broadly flat compared to 2020’s elevated level, while revenues are seen rising as the economy recovers. The net result will be a still-large budget deficit, and suggests that the government’s priority is to shore up economic activity rather than push for immediate fiscal consolidation. However, there are question marks over the government’s ability to execute its spending plans, given the weak disbursement of funds during Q2 of this year despite the announcement of sizeable fiscal stimulus measures in the same period.

Spending for 2021 is forecast at IDR 2748 trillion (2020 revised figure: IDR 2739 trillion), with revenue at IDR 1776 trillion (2020 revised figure: IDR 1700 trillion). Looking at individual spending areas, infrastructure spending should see a large boost relative to 2020, while health and social spending are predicted to decline as unemployment falls and progress is made to contain the virus. The budget deficit is expected to narrow to 5.5% of GDP from a projected 6.3% of GDP this year: both figures are broadly in line with our panelists’ predictions. Moreover, the budget is based on assumptions of real GDP growth of 4.5%–5.5%, inflation of 3.0% and an exchange rate of IDR 14,600 per USD, which again largely matches our Consensus.

Analysts at Nomura state that the 2021 budget “represents a slower pace of deficit reduction which, in our view, reflects the government’s delicate balancing act, as it needs to ensure that the fiscal stance does not undermine the recovery (amid an uncertain outlook due to the COVID-19 pandemic) but at the same time lay out a credible consolidation plan (given that by 2023, the deficit is required to return to below 3% of GDP).”

FocusEconomics Consensus Forecast panelists expect a fiscal deficit of 6.6% of GDP in 2020 and 4.9% of GDP in 2021.