Indonesia's 2025 Draft Budget: A High-Stakes Gamble on Growth and Subsidies

Indonesia's government has unveiled its draft budget for 2025, projecting ambitious growth while preparing for increased expenditures that could strain fiscal discipline. The budget, presented by Finance Minister Sri Mulyani Indrawati, outlines a fiscal deficit target of 2.53% of GDP, up from the 2.29% targeted for 2024, amid rising spending demands and uncertain revenue prospects.

Economic Growth and Inflation Projections

The government forecasts GDP growth to accelerate modestly to 5.2% in 2025, slightly above the 5.1% expected this year. This growth is expected to be supported by an uptick in private consumption and a modest increase in public investment. A significant contributor to this projected growth is the introduction of President-elect Prabowo Subianto's free lunch program, which is anticipated to add 0.1 percentage points to GDP. Additionally, export gains are expected to accelerate as well in 2025 . Inflation is expected to moderate to 2.5%, aligning with the central bank's target range. However, the Indonesian rupiah's (IDR) performance against the US dollar is projected to weaken slightly, reflecting a cautious outlook amid global uncertainties and domestic challenges. The unemployment rate is expected to fall below 5%, indicating that the economy is approaching full employment. However, the projections for increased oil and gas production seem unrealistic, given the ongoing decline in oil output each year due to insufficient investment in infrastructure and the aging of facilities in Indonesia.

The 10-year bond yield is anticipated to rise slightly above 7%, reflecting government expectations of a higher risk premium on emerging markets. This could be due to the possibility of the Federal Reserve cutting rates more quickly than Bank Indonesia, which would widen the interest rate spread between the two.

Figure 1: Budget 2025 Bill 

Revenue Projections: Optimism or Overreach?

Total state revenues are projected to increase by 6.9% to IDR 2,996.9tn. This optimistic forecast hinges on a significant rise in tax revenues, expected to jump by 12.3%, partly due to a planned 1 percentage point increase in VAT to 12%. However, Minister Indrawati remained tight-lipped about the VAT hike during the budget announcement, leaving its implementation to her successor.

While the government anticipates robust domestic revenue growth, concerns linger over the sustainability of these projections, particularly given the underperformance of tax revenues in the current year. Non-tax revenues are expected to decline by 8%, though this follows a better-than-expected performance in 2024, tempering immediate concerns.

Spending Priorities and Rising Deficit Risks

On the expenditure side, the budget outlines a 5.9% increase, bringing total spending to IDR 3,613.1tn. This rise is primarily driven by significant allocations to social programs, including the free lunch initiative, which alone will cost IDR 71tn. Additionally, the government plans to bolster food security with a substantial increase in subsidies for paddy and corn fertilisers, while energy subsidies are set to rise by 6.1% to IDR 204.5tn.  These increases come at the cost of cuts to other areas, notably infrastructure and defence spending, which are set to decrease by 5% and 5.7%, respectively. The reallocation of funds to social programs reflects a shift in the government's spending priorities, but it raises questions about the long-term impact on critical infrastructure development and national security.

Debt Issuance and Fiscal Concerns

Figure 2: Budget Deficit Financing (IDR tn)

To finance the expanding deficit, net debt issuance is slated to rise by 42.2% to IDR 642.6tn. This substantial increase underscores the government's reliance on borrowing to fund its ambitious spending plans. The higher debt levels are expected to push up the 10-year bond yield above 7%, reflecting the anticipated rise in Indonesia's risk premium as global financial conditions tighten.

Conclusion: A Budget Fraught with Risks

We view the 2025 budget bill as particularly risky compared to the previous three budgets. There is a possibility that the deficit could once again exceed the 3% of GDP legal limit due to several challenges embedded within the bill.

On the revenue side, there's a potential risk of tax revenues falling short, especially in the current environment of low commodity prices. While the government may be counting on higher employment to boost tax income, we believe there is a significant chance that revenues could still miss the target.

On the expenditure side, the proposed spending cuts in various ministries pose another risk, as these reductions may prove difficult to implement effectively. If these risks materialize simultaneously, the fiscal deficit could surpass the 3% threshold.