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Indonesia approves tax amnesty to avoid fiscal cliff

Indonesia’s government revised its budget for 2016 and approved a much-delayed tax amnesty bill on 28 June in an effort to stem a widening budget gap. Weak tax revenues have threatened to interfere with President Joko Widodo’s ambitious stimulus plans, which are designed to kick the economy into a higher gear through infrastructure spending. The tax amnesty law offers citizens a nine-month window in which to declare previously unreported assets and pay a low tax rate. This should provide a needed boost to government revenues. More importantly, the bill should widen Indonesia’s tax base going forward, addressing a key economic concern. Indonesia has a population of over 255 million people, however, only 27 million are registered tax payers and less than 1 million paid income tax in 2014.

Alongside the tax amnesty bill, the government revised its budget for 2016, widening the expected fiscal deficit from 2.15% to 2.35% of GDP. Included in the revised budget is IDR 165 trillion in extra revenues (1.3% of GDP) expected to be generated by the tax amnesty bill. However, slow growth and low commodities prices are likely to hit the public purse and total government revenues were revised down from IDR 1,823 trillion in the original budget to IDR 1,786 trillion (14.1% of GDP). Meanwhile, expected government expenditure was revised down slightly from IDR 2,096 trillion to IDR 2,083 trillion (16.5% of GDP). Despite the revision, government spending is expected to pick up from last year, when delays and bottlenecks hampered the government’s stimulus plans.

FocusEconomics Consensus Forecast panelists are less optimistic about the government’s finances than the Ministry of Finance and sees Indonesia’s fiscal deficit at 2.6% in 2016. A number of our panelists believe the government’s estimate of extra revenue from the tax amnesty is too optimistic and foresee a shorter windfall. Commenting on HSBC’s forecasts, Su Sian Lim, ASEAN Economist at HSBC, states:

“Although the tax amnesty bill has been passed, it remains to be seen if state revenues will be lifted to the degree authorities expect. As such, we continue to pencil in a budget deficit of 2.6% of GDP for this year, wider than the 2.4% we forecast in the previous quarter and that projected by the government in the revised 2016 budget. In contrast to the government, our forecast does not assume an additional IDR165trn in revenues from the amnesty. However, it does assume that the government spends only 90% of projected expenditure, similar to the achievement ratio recorded in a likewise ‘slow’ year, such as 2015.”

Euben Paracuelles, Analyst at Nomura sees an even more pronounced fiscal deficit, commenting:

“The government retains its estimate that the amnesty will have a revenue impact of IDR165trn (1.3% of GDP). In our view this estimate is subject to a high degree of uncertainty, but the passage of the bill nevertheless provides an upside to our 2016 fiscal revenue forecasts. These additional revenues could be used to allow the government to push ahead with even higher capital expenditures (for which we have already forecast a significant 27% y-o-y increase), or narrow the fiscal deficit from our current forecast of 2.9% of GDP.”

Market reaction to the tax amnesty bill has been positive and the rupiah rose to a nearly-three-month high on 29 June. On top of the gains for government revenues, the bill has the potential to draw capital inflows into the country as assets that are repatriated pay a reduced penalty rate. Repatriated funds are subject to a three-year-holding period in Indonesia and can be invested in a number of investments deemed appropriate by the Ministry of Finance, such as government and corporate bonds. However, repatriation remains highly uncertain as individuals may have hesitations about repatriating assets given the holding period or an attitude of mistrust with regard to the government.