Coordinating Minister Airlangga proposes emergency regulation to anticipate APBN deficit exceeding three percent
Jakarta—Coordinating Minister for Economic Affairs Airlangga Hartarto has proposed the enactment of a Government Regulation in Lieu of Law (Perppu) to anticipate a worst-case scenario in which the ongoing conflict in the Middle East, by driving up global crude oil prices, could cause Indonesia’s state budget deficit to exceed three percent of GDP.
According to Airlangga, should the Middle Eastern conflict persist and lead to sustained increases in global crude oil prices, maintaining a three percent budget deficit will become untenable.
During a plenary cabinet session at the Presidential Palace in Jakarta on Friday, Coordinating Minister Airlangga provided an explanation of the Perppu mechanism, drawing parallels to its use during the COVID-19 pandemic.
“We have implemented a Perppu before, Mr President, during COVID-19, and there are several factors that need to be included in the Perppu we are preparing, particularly regarding timing—which is ultimately a political decision for the President,” said the Coordinating Minister for Economic Affairs.
The proposed emergency regulation would incorporate several fiscal measures: first, emergency tax relief on corporate income tax and value-added tax for affected sectors, implemented without amending tax legislation; second, exemptions from import duties on certain raw materials to maintain Indonesia’s export competitiveness; third, tax deferrals for small and medium enterprises and energy-intensive industries; and fourth, potential revenue from windfall gains on non-tax state revenue from oil and gas and commodities.
“We can potentially collect additional revenue from items that typically rise alongside oil prices,” Airlangga explained to President Prabowo. “Palm oil, nickel, gold, and copper prices usually increase when petroleum prices rise, so we could potentially implement additional taxation on these.”
The Coordinating Minister emphasised that the Perppu would provide the government with greater operational flexibility.
During the same cabinet session, Airlangga presented three economic scenarios reflecting potential impacts of the conflict on state finances, assuming the Iran-Israel-United States conflict could extend for up to 10 months.
The most pessimistic scenario projects that the state budget deficit could exceed four percent. “In the worst-case scenario, with crude oil at 115 US dollars per barrel, the rupiah at 17,500 per US dollar, economic growth at 5.2 percent, and government bond yields at 7.2 percent, the deficit would reach 4.06 percent,” said Airlangga to President Prabowo during the plenary cabinet session.