Airlangga Proposes Emergency Budget Deficit Allowance Above 3 Per Cent If Middle East Conflict Worsens

Coordinating Minister for the Economy Airlangga Hartarto has proposed issuing a Government Regulation in Lieu of Law (Perppu) as a precautionary measure should Middle East conflict trigger a spike in global oil prices and push the state budget deficit beyond the 3 per cent threshold against gross domestic product (GDP). The proposal was presented by Airlangga during a Full Cabinet Session at the State Palace in Jakarta on Friday.

According to Airlangga, escalation of conflict in the region has the potential to increase global crude oil prices, which ultimately could strain Indonesia’s fiscal condition. He believes that in such circumstances the government requires policy flexibility, including through issuing a Perppu as was done during the Covid-19 pandemic.

“We implemented a Perppu during Covid-19. These are several factors that need to be included in the Perppu we are preparing, regarding timing this is naturally a political decision for the President,” Airlangga stated during the meeting.

In his presentation to Prabowo Subianto, Airlangga outlined several policy options that could be included in the Perppu.

Firstly, the government could provide emergency incentives for income tax (PPh) and value-added tax (PPN) for affected sectors without having to amend tax legislation.

Secondly, exemption of import duties on certain raw materials to maintain national export activity.

Thirdly, deferral of tax obligations for small and medium enterprises (UMKM) and energy-intensive industries vulnerable to energy price increases.

Additionally, the government could potentially obtain supplementary state non-tax revenue (PNBP) from the commodities sector. Airlangga noted that increases in oil prices are typically accompanied by increases in other commodity prices such as crude palm oil, nickel, gold and copper, which could provide a windfall for the state. In such circumstances, the government could consider imposing additional taxation to compensate for fiscal pressure.

According to Airlangga, issuing a Perppu would provide greater policy flexibility for the government in responding to uncertain global economic conditions. With such regulation, the government could continue social assistance programmes such as energy assistance transfers, expand emergency social aid through presidential regulation, and continue issuing State Securities (SBN) by utilising Budget Surplus Balance (SAL).

In the same meeting, Airlangga presented three scenarios of conflict impact on national finances should war between Iran, Israel and the United States last up to ten months. In the worst-case scenario, he projected state budget deficit could reach 4.06 per cent of GDP, based on assumptions of global crude oil prices reaching 115 US dollars per barrel, the rupiah weakening to Rp17,500 per US dollar, economic growth of 5.2 per cent, and State Securities yields of 7.2 per cent.