Key facts
- Indonesia's parliament is discussing changes to its state finance law, including the fiscal deficit limit.
- The current law caps the annual budget deficit at 3% of GDP and public debt at 60%.
- Lawmakers are considering exceeding the deficit limit to boost economic growth and welfare.
- A lawmaker from the ruling coalition argued the 3% cap hinders growth and escaping the middle-income trap.
- An opposition lawmaker warned that markets would discipline Indonesia if fiscal discipline is lost.
- Economists suggested alternative measures like regulating the debt service ratio or setting an average deficit limit over time.
Indonesia's parliament is deliberating potential changes to its state finance law, which could see the country's fiscal deficit limit raised beyond the current 3% of GDP. The discussions come as lawmakers seek to boost economic growth and improve welfare, with some arguing the existing cap hinders progress.
President Prabowo Subianto, who took office in October 2024, has set an ambitious 8% economic growth target, and his administration's 2025 budget deficit is projected to be the widest in over two decades, excluding the pandemic period. Mukhamad Misbakhun, head of the parliamentary financial committee, stated that the 3% deficit cap has been treated with excessive reverence and that escaping the middle-income trap requires growth expansion, which the current limit may restrict.
Mohamad Hekal, deputy head of the committee and a member of Prabowo's party, echoed the sentiment that the fiscal deficit limit should be discussed, as it might impede Indonesia's welfare goals. However, Harris Turino, a lawmaker from the opposition, voiced support for maintaining the 3% ceiling, warning that a lack of self-discipline in fiscal matters could lead to market-imposed discipline.
Economists presenting at the hearing suggested that if lawmakers decide to remove the fiscal limits, alternative measures to ensure fiscal discipline should be implemented. These could include regulations on the government's debt service ratio or interest payments relative to tax revenues. Chaikal Nuryakin, an economist from the University of Indonesia, proposed setting an average deficit limit over a five or ten-year period to allow for flexibility while maintaining prudence. Harris Turino indicated that the revision is unlikely to be completed in the current parliamentary session, which concludes in November. The discussions follow a surprise leadership change in Indonesia's finance ministry.