Dominance of Informal Workers Risks Pressuring Indonesia's Tax Revenue

The government faces a policy dilemma with no truly comfortable options. Increasing global uncertainty is seen as driving the growth of the informal sector in various countries, including Indonesia. This situation has the potential to pressure tax revenues and hinder long-term economic growth. Head of Research for the World Bank’s Development Research Group, Aaditya Mattoo, states that the informal sector often serves as a “buffer” when the economy faces pressures.

“The informal sector often acts as a cushion during economic shocks. However, this is not a long-term solution because its productivity and contribution to state revenues are limited,” he said during an online press conference on Wednesday (8/4).

According to Aaditya, in situations of uncertainty, businesses tend to hold back on expansion and reduce formal hiring. As a result, more workers are pushed into the informal sector, which lacks income certainty and social protection.

He explained that the dominance of the informal sector also impacts a narrower tax base, as most actors in this sector are not reached by the tax system.

“This condition can reduce the government’s ability to collect state revenues, even as spending needs increase to respond to the crisis,” he clarified.

Additionally, informal sector workers generally have limited access to financing, technology, and markets, making it difficult to improve productivity. Aaditya believes the government needs to encourage the transition of the informal sector to the formal one through improvements in financing access, digitalisation, and simplification of business regulations.

“The important thing is not just creating jobs, but ensuring those jobs are productive and provide welfare,” he emphasised.