Photo by TheInsiderStories

JAKARTA (TheInsiderStories) – Over reliance on tax revenue to finance state budget raises question on the President Joko Widodo’s administration to achieve higher economic growth and a more expansive social welfare program next year, according to economists.

Economist from University of Indonesia Faisal Basri said high dependence on tax revenue exposes Indonesia’s fiscal posture to instability. He said economic slowdown may lead to a drop in corporate income tax, which in Indonesia contributes for around 90 percent of tax revenue.

That was an inversion compared to the ideal tax revenue structure for developing economies like Indonesia, as suggested by the Organization for Economic Co-operation and Development (OECD). The Paris-based organization sees that developing economies should rely more on personal income tax, followed by value added tax and finally corporate income tax.

On 2018 state budget, the government has allocated Rp2,204.4 trillion for spending next year, a 3.3 percent increase from Rp2,133.3 trillion set in the revised 2017 state budget.

Meanwhile the state revenue for next year has been set at Rp1,878.4 trillion an increase of 8.1 percent compared to Rp1,736.1 trillion targeted in this year’s revised budget. The growth is lower compared to 12 percent seen between 2016 and 2017 state budgets.

Chart by Finance Ministry

The government is pinning hopes that higher infrastructure spending will stimulate the economy and achieve the 5.4% goal in 2018.

Basri suggested that the government should put a much less ambitious plan on its infrastructure agenda due to the likelihood of tax revenue shortfall.

“The biggest challenge will occur in the end of this year. Shortfall is potentially increasing as there is no more tax amnesty until the end of this year,” said Basri.

Lana Soelistianingsih, economist from Samuel Asset Management said it will be very difficult for Indonesian authorities to achieve its 11.5 percent tax-to-GDP ratio target in 2017 despite the positive impact of the government’s recently completed tax amnesty program.

“Over the past five years, Indonesia – on average – only achieved 83 percent of its annual tax revenue target,” she said.

Therefore, Soelistianingsih stressed it is important to set  tax revenue target more in line with actual realization. Indonesia’s tax revenue realization reached Rp 770 trillion (approx. US$57 billion) up to the end of September 2017, or a modest 60 percent of the full-year target.

“However, with Indonesia’s retail sales still in a rather bleak state, there are major concerns whether tax revenue realization can come close to the target this year,” she said.

Minister of Finance Sri Mulyani said tax revenue is not the only source of financing in Indonesia’s infrastructure agenda. She said Indonesia’s investment-grade ratings and favorable outlook will entice investors to finance the nation’s infrastructure projects.

She added the government has rolled out many initiatives intended to increase infrastructure spending over the period to 2019.

“We still believe the positive outlook from rating agencies can bring benefit so the financing can more rely to private financing,” she said, Monday (23/10).

She admitted tax policy is not yet fully optimized, as reflected in Indonesia tax-to-GDP ratio at 11 percent. Thus, government had set a tax-to-GDP-ratio target of 16 percent by 2019 from the current of 10.30 percent through various efforts.

These include making financial information more transparent by joining the Automatic Exchange of Information (AEOI) and cooperating with other countries to fight tax evasion by multinational companies and rich people.

Writing by Elisa Valenta, Email: