July 10, 2024
JAKARTA – The central government’s fiscal deficit this year is projected to be much larger than planned as the state is set to spend more but collect less in tax than laid out in the budget for this year.
Finance Minister Sri Mulyani Indrawati revealed on Monday that the deficit is now seen at 2.7 percent of gross domestic product (GDP), far outstripping the figure of 2.29 percent stated in the 2024 state budget plan.
Speaking in front of the House of Representatives’ budget committee, Sri Mulyani attributed the higher deficit projection to “a combination of state revenue undergoing a correction” and “state spending experiencing positive growth”.
Sri Mulyani detailed in her presentation that tax revenue this year, according to the latest projection, would reach only 96 percent of the targeted amount, but she went on to highlight that the nominal value would still mark an annual increase of 2.9 percent, indicating a “safe national economy”.
Shortly beforehand, she had revealed that the government had been struggling to collect taxes in the first half of 2024 because of the “decline in commodity prices” taking a toll on corporate profits.
Overall tax revenue in the first half was down 7 percent year-on-year (yoy), with corporate income tax plummeting 34.5 percent yoy.
Collection in the mining industry experienced the most significant contraction at 58.4 percent yoy, followed by manufacturing with a 15.4-percent annual decline.
State spending, on the other hand, was projected to be almost 2.6 percent or Rp 87.1 trillion (US$5.36 billion) over budget, driven by spending on central government ministries and agencies, which is seen to exceed the planned figure by almost 10 percent.
Sri Mulyani mentioned that funding for the construction of the new capital city of Nusantara, social assistance and regional elections was among the factors fueling the higher spending.
“The same goes for spending on [energy] subsidies and compensation, which is estimated to rise due to [greater] volumes, the [lower rupiah] exchange rate and [higher] prices,” said Sri Mulyani.
Read also: Nusantara construction to be suspended for Independence Day event
Domestic oil and gas lifting for the year is projected to fall short of the target, which would force the country to import more of the commodities, resulting in increased spending.
The rupiah is now projected to average around Rp 16,000 per dollar this year, far below the assumption of Rp 15,000 set in the state budget, meaning the country must spend more in rupiah terms to pay for its imported oil and gas in US dollars.
The minister also pointed out that the government had spent Rp 155.7 trillion on subsidies and compensation payable to state-owned energy companies in the first half, mostly for fuel and electricity, and would need to fork out more for these items in the second half.
Despite the deficit now expected to amount to Rp 609.7 trillion rather than the Rp 522.8 trillion stated in the 2024 budget plan, Sri Mulyani vowed not to rely heavily on bonds to fill the gap, so as to maintain “the competitiveness of our bond yield”.
The current high interest rate environment globally makes financing through bond issuance more costly, but the government has one more financing source in its toolbox, namely unused funds from earlier budgets.
With the help of these funds, Sri Mulyani aims to issue Rp 214 trillion less in bonds than the Rp 666.4 trillion initially planned in the budget.
The minister filed a request to draw down another Rp 100 trillion of these unused budget funds for this year’s financing, which the House budget committee approved on Tuesday.
Wijayanto Samirin, an economist at Paramadina University, told The Jakarta Post on Monday that the weak tax collection was caused by “inferior GDP growth” in 2023 that resulted in lower corporate tax revenue this year.
He also said that this year’s tax collection was projected to be lower due to “unconvincing GDP growth in 2024”, the first quarter of which, he argued, was chiefly pushed up to 5.11 percent by the Ramadan festive season, the general election, as well as increased social assistance.
“Actually, what’s more concerning is the medium- and long-term trajectory. Premature deindustrialization resulted in a decline in the [tax] contribution from the manufacturing sector. […] Meanwhile, the manufacturing sector and the formal sector are the main sources of our tax revenue,” said Wijayanto.
“So, the [cause] of our revenue problem is not cyclical, it’s very structural indeed. If we combine that with larger state expenditure in the coming years, including for social assistance, Nusantara and debt servicing, then our problem is complete,” he added.
Read also: High debt to shrink fiscal space for Prabowo administration
Center of Economic and Law Studies executive director Bhima Yudhistira Adhinegara told the Post on Monday that the potentially swelling deficit was “a warning” for president-elect Prabowo Subianto, given that his programs, which many perceive to be expansionary, were not even included in the calculation yet.
“Our state budget is [hardly in great shape], so a rationalization of programs is needed, including for the Rp 71 trillion budget allocation for the free school meals [program]; maybe it can be reduced. [The new capital city plan] also requires budget rationalization so as to safeguard fiscal credibility,” said Bhima.