Indonesia’s Tax Revenue Slump Sparks Economic Concerns

By Nadira Wulandari

Cover Image Attribute: Jakarta Skyline / Source: Abdul Azis, Flickr

Indonesia’s fiscal landscape is facing mounting pressure as a dramatic 30% slump in tax revenue during the January- February period of 2025 has sparked widespread concerns over the country’s economic stability. On Thursday, the Ministry of Finance reported that tax revenue, including customs and excise, totaled 240 trillion rupiah ($14.6 billion) for the first two months of the year, a steep decline from the 320.5 trillion rupiah collected in the same period in 2024. This figure accounted for 75% of total state revenue, dropping by 20.8% year-on-year to 316.9 trillion rupiah. Meanwhile, government spending reached 348 trillion rupiah, resulting in a budget deficit of 31.2 trillion rupiah, or 0.13% of gross domestic product (GDP). This marks a stark reversal from the surplus of 26 trillion rupiah (0.11% of GDP) recorded a year earlier and represents the first deficit for this period since the height of the COVID-19 pandemic in 2021.
Finance Minister Sri Mulyani Indrawati attributed the sharp decline in tax revenue to a combination of global economic volatility and falling commodity prices, particularly for coal, nickel, and crude oil—key pillars of Indonesia’s export-driven economy. As a major producer of these commodities, the country has been hit hard by their downward trajectory since record highs in 2022. “These declines will impact both spending and revenue,” Indrawati told reporters in Jakarta, emphasizing the external pressures weighing on Southeast Asia’s largest economy. Deputy Finance Minister Anggito Abimanyu echoed her sentiments, noting that the drop in commodity prices has significantly affected sectors like mining, manufacturing, and finance, leading to a notable decline in corporate tax collections. Adding to the fiscal strain, a delay in collecting value-added tax (VAT) in January—stemming from public backlash over a proposed hike from 11% to 12%—further exacerbated the revenue shortfall. Although the government scaled back the VAT increase, this decision has made meeting the ambitious tax revenue target of 2,490.9 trillion rupiah for 2025 even more challenging.
The early-year deficit has intensified concerns among analysts about Indonesia’s fiscal health sustainability, mainly as President Prabowo Subianto presses forward with expansive welfare initiatives. Prabowo, who took office with promises of transformative growth, has prioritized programs such as providing free meals to nearly 80 million schoolchildren and constructing 3 million affordable homes annually for low-income families. These ambitious plans, however, come at a time when the government is grappling with shrinking revenues and a shifting economic landscape. Indonesian law caps the budget deficit at 3% of GDP, and the government has set a target of 2.53% for this year. Despite reports that Prabowo has pushed to raise this ceiling, finance ministry officials insisted on Thursday that they intend to “maintain the previously set figure.” Sri Mulyani reinforced this stance: "The budget posture does not change. We will maintain the deficit at 2.53% of GDP, including by considering any correction in revenues.”
Analysts, however, remain wary of the risks ahead. Josua Pardede, chief economist at Bank Permata, warned that the January-February deficit signals “serious fiscal challenges” to Prabowo’s goal of achieving 8% annual economic growth by the end of his five-year term in 2029. “The risk of a widening deficit persists, particularly if global uncertainty continues, with commodity price volatility impacting exports and domestic tax revenues,” he told Nikkei Asia. Pardede stressed that such robust growth would require significant efforts to stabilize the domestic economy, optimize exports, and navigate increasingly complex external pressures. The government’s decision to reallocate 306 trillion rupiah from the budgets of various ministries and state institutions to fund Prabowo’s priority programs—chiefly the free meals initiative and the new sovereign wealth fund, Danantara Indonesia—has further complicated the fiscal equation. This reallocation has triggered significant cuts to departments like the Ministry of Public Works and the Ministry of Transportation, prompting public outcry over potential impacts on public services, university tuition fees, and employment.
The fiscal turbulence has also taken a toll on the rupiah, which has emerged as one of Asia’s worst-performing currencies in 2025. BMI, a research firm, noted that the government’s abrupt shift in spending plans, combined with policy volatility in the United States, has rattled investors. In a Tuesday report, BMI forecasted the rupiah weakening to around 17,000 per U.S. dollar by year-end, up from its current rate of approximately 16,435. “Compounding this, the government’s abrupt shift in spending plans was poorly received by investors,” the report stated, highlighting the broader economic uncertainty fueling the currency’s decline. Financial markets have been closely monitoring Indonesia’s budget figures, especially after the government kicked off the year with $19 billion in planned budget cuts, the cancellation of the VAT hike, and the rollout of Prabowo’s flagship school meals program.
The government is exploring several strategies to bolster its finances in response to the revenue shortfall. Deputy Finance Minister Abimanyu indicated that efforts are underway to boost non-tax revenue, including raising royalties from mining companies for commodities like coal, nickel, and palm oil. He also expressed optimism about a potential recovery in VAT receipts, citing economic indicators such as the purchasing managers’ index and rising motorcycle and car sales. However, challenges persist. The introduction of Coretax, a new digital taxation system aimed at improving compliance, has been plagued by glitches and outages, hindering taxpayers’ ability to report transactions. Nailul Huda, director of economic research at the Center for Economic and Law Studies, urged the finance ministry to address these issues swiftly. “With transaction reporting being hindered, the tax-to-GDP ratio might decline in 2025, potentially pushing the state budget deficit above 3%,” he cautioned.
Despite the mounting challenges, the finance ministry remains committed to funding key initiatives. Sri Mulyani confirmed that additional resources would be directed toward school meals, renovations, energy projects, and the Danantara Sovereign Wealth Fund. The government also plans to inject capital into logistics company Bulog and three newly established state firms in the agriculture sector. For now, officials are banking on a combination of administrative adjustments, economic recovery, and alternative revenue streams to keep the deficit in check. Yet, as global economic headwinds persist and domestic demands grow, Indonesia’s fiscal tightrope walk is becoming increasingly precarious. Whether Prabowo’s vision of robust growth and expansive welfare can coexist with fiscal discipline remains an open question that will likely define the trajectory of his presidency and the nation’s economic future.

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