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Published: 2025-10-16T06:17:20.000Z

Indonesia’s 2026 Budget: Populist Spending Meets Fiscal Strain

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Indonesia’s 2026 budget marks President Prabowo Subianto’s first full fiscal blueprint—anchored in expansive social spending and a sharp 30% rise in defence outlays, while sidelining his predecessor’s infrastructure push. With revenue targets based on optimistic assumptions and growth forecast at 5.4%, fiscal discipline risks eroding, and the deficit is likely to breach the 3% cap. The budget underscores Prabowo’s shift toward populist welfare and food security priorities, but questions over sustainability and revenue credibility loom large.

Indonesia’s newly approved 2026 state budget marks a defining turn in the country’s fiscal strategy — one that firmly embeds President Prabowo Subianto’s populist social agenda while diluting the infrastructure-heavy model of his predecessor, Joko Widodo. It reflects a deliberate recalibration of fiscal priorities, aimed at consolidating domestic support and delivering social gains, even at the expense of tighter budgetary discipline.

Approved by the parliament, the IDR 3,842.7 tn (USD 231.5bn) budget is Prabowo’s first full-year fiscal blueprint. It represents both a political statement and a structural reset. Social welfare and defense dominate, while the once-central infrastructure drive recedes into the background. The headline deficit, officially projected at 2.68% of GDP, assumes buoyant revenue growth of 10% — a forecast we view as over-ambitious. 

The government’s revenue assumptions rest on tighter tax enforcement, customs receipts, and commodity export duties — even as domestic demand weakens and global prices remain soft. Indonesia’s large informal economy further limits the tax base. In this context, the Ministry of Finance’s optimism on both growth and revenue is overstated. Our base case places GDP growth closer to 4.8%, well below the government’s 5.4% assumption, implying a likely breach of the 3% fiscal ceiling that has underpinned Indonesia’s macro credibility for two decades.

The free lunch programme, Prabowo’s signature campaign promise, almost doubles in allocation to IDR 335 tn (1.3% of GDP), cementing its position as the administration’s flagship policy. The initiative aims to bolster school attendance and nutrition, but it has already faced corruption risks and food safety controversies. Its scale and rapid rollout will test Indonesia’s institutional capacity and governance at the local level. Broader social spending — covering food security, health, and education — also rises sharply. Yet this expansion has come partly at the expense of regional transfers, which have been cut by about IDR 230tn. The reduction threatens local fiscal autonomy and could prompt provinces to raise their own taxes or delay service delivery, introducing new sources of political friction. Meanwhile, defense spending in the 2026 budget jumps nearly 30% to IDR 187tn, signalling Prabowo’s ambition to modernise the military and expand its operational reach. While the increase reinforces his image as a security-focused leader, it also entrenches the military’s growing role in civilian administration — a trend that may complicate institutional checks and balances.

By contrast, infrastructure investment takes a quieter role. Funding shifts away from large-scale transport projects and the new capital relocation towards dams, irrigation, and energy security. Much of this is being channelled off-budget through state-owned enterprises (SOEs), public–private partnerships, and the sovereign wealth fund, Danantara. This off-balance-sheet approach keeps the central deficit low on paper but increases quasi-fiscal risk and opacity across the broader public sector.

The dismissal of former finance minister Sri Mulyani Indrawati, long viewed as a pillar of fiscal credibility, rattled investor confidence earlier this year. Her successor, Purabaya Yudhi Sadewa, has made only modest revisions to the expenditure framework but has clearly adopted a more flexible stance toward deficit management. While public debt remains sustainable and global borrowing costs are easing, a persistent breach of the 3% rule could undermine Indonesia’s reputation for fiscal prudence.

The government’s aspiration to achieve a balanced budget by 2028 looks increasingly aspirational. Without significant new tax measures or broader formalisation of the economy, revenue collection will lag behind spending commitments. Overall, the 2026 budget underlines Indonesia’s shift toward a state-driven model of economic management. Social spending and defense modernisation take precedence, while fiscal consolidation and productivity-linked investment recede. The strategy may succeed in sustaining near-term demand and political stability, but it risks constraining future growth if public resources continue to flow into consumption-heavy, low-multiplier programmes rather than infrastructure and industrial capacity.

Budget 2026 Highlights

Indicator2026 Budget Target2025 (Est.)
Total ExpenditureIDR 3,842.7tn (USD 231.5 bn)IDR 3,786.5tn
Total RevenueIDR 3,153.6tn IDR 2,870.2 tn
Fiscal DeficitIDR 689.15 tn (2.68% of GDP)2.78% of GDP
GDP Growth (Real)5.40%5.20%
Inflation Target2.50%2.80%
Exchange Rate AssumptionIDR 16,500 / USDIDR 15,800 / USD
Oil Price (ICP)USD 70 per barrelUSD 75 per barrel
Free Meals ProgrammeIDR 335 tn (1.3% of GDP)IDR 180 tn
Defence SpendingIDR 187 tnIDR 143 tn
Regional TransfersIDR 692.9 tnIDR 919 tn
Public Debt-to-GDP~39% (projected)38.20%
Revenue Growth Assumption+10.0% y/y+8.0% y/y

 

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