Indonesia 2019 set to end with wider fiscal deficit amid poor tax revenue

Indonesia government’s 2019 fiscal position stands in stark contrast with that of the preceding year amid weak global commodity prices and a slowdown in global trade, which contributed to disappointing tax revenue and a wider fiscal deficit.

As of November, this year’s tax revenue – which includes income tax, value added tax (VAT), luxury tax (PPnBM) and land and building tax (PBB) and more – has reached Rp 1.13 quadrillion (US$80.84 billion). That is only 72.02 percent of the Rp 1.57 quadrillion target set in the 2019 budget and marks a marginal drop from tax collected over the corresponding period of last year.

Almost every business sector recorded lower tax payment in 2019 compared to last year. The manufacturing sector, which contributed around a third of total tax revenue, contracted by 3.1 percent year-on-year (yoy) in the first 11 months of this year to Rp 312.9 trillion, in contrast to 12.1 percent yoy growth booked over the same period last year.

The trade sector, which is the second-largest tax revenue contributor, booked 2.2 percent yoy growth to Rp 219.34 trillion in the January-November period, significantly lower than 23.2 percent yoy growth recorded over the same period in 2018.

Slower global trade also impacted Indonesia’s import and export duty revenue, which dropped by 5.04 percent yoy and 48.49 percent yoy, respectively, in the first eleven months.

Non-tax revenue (PNBP), which is heavily reliant on fluctuating global commodity prices, booked 3.44 percent yoy growth as of November this year to Rp 362.76 trillion, in contrast to 35.1 percent growth recorded over the same period last year. PNBP from the natural resources sectors contracted by 9.22 percent to Rp 139.14 trillion as of November from Rp 153.74 trillion of PNBP revenue collected over the same period last year.

Finance Minister Sri Mulyani Indrawati said unfavorable external conditions had contributed to the decline in non-tax revenue from the natural resources sectors.

“If growth in China and India weakens, while Europe’s [economy] hasn’t recovered and the United States cannot sustain [its growth], usually the [PNBP] receipt from the natural resource sectors are negatively impacted,” said Sri Mulyani on Dec. 19.

Center of Indonesia Taxation Analysis (CITA) executive director Yustinus Prastowo said the sluggish economic activities, coupled with lower commodity prices in 2019 compared to last year, had hurt tax revenue.

According to a CITA estimation, tax revenue this year will fall between Rp 227.9 trillion and Rp 267.1 trillion short of the target.

State expenditure, meanwhile, grew 5.3 percent as of November to Rp 2.04 quadrillion, or 83.14 percent of the Rp 2.46 quadrillion target in the 2019 budget. Spending by the central government was recorded at Rp 1.29 quadrillion over the same period, while budget transfers to regional administrations reached Rp 752.85 trillion.

Social spending increased by 44.05 percent as of November to Rp 105.71 trillion, already exceeding the Rp 97.06 trillion allocated for the spending item in the 2019 state budget.

The increased social spending was fueled by increasing disbursement for the National Health Insurance (JKN) as the government increased the premium for the contribution assistance recipients (PBI), while it also increased the budget allocation for the Family Hope Program (PKH) from Rp 17.1 trillion in 2018 to Rp 34.3 trillion this year.

With the lower Indonesia Crude Price (ICP), only Rp 123 trillion in energy subsidies were disbursed as of November, a 5.3 percent contraction from Rp 130.4 trillion spent on energy subsidies over the same period last year. However, that did little to reduce the overall budget deficit.

Sri Mulyani said the state budget was designed with a “natural” countercyclical feature to stimulate economic growth at a time when the economy slowed down.

“By design, the state budget could create a natural countercyclical [effect]. Tax revenue will accelerate in times of boom, which acts as a natural brake to prevent the economy from overheating,” said Sri Mulyani.

Meanwhile, if the economy entered a period of bust, the weak tax revenue would result in a wider-than-expected fiscal deficit, which would act as a stimulant to the economy, she went on to explain.

As of November, the fiscal deficit reached Rp 368.94 trillion, equal to 2.3 percent of the gross domestic product (GDP), which was significantly wider than the Rp 296 trillion fiscal deficit, or 1.84 percent to the GDP, targeted in the 2019 budget.

With weak revenue collection throughout this year, the government expects the full-year fiscal deficit to be 2.2 percent of GDP in 2019, Sri Mulyani said, adding that tax revenue showed early signs of recovery.

Marchio Irfan Gorbiano

The Jakarta Post