Indef: Spending Reallocation Key to Keeping the State Budget Deficit in Check Amid Middle East Conflict

Jakarta (ANTARA) — The Institute for Development of Economics and Finance (Indef) has stressed that reallocating spending is the most realistic step for the government to keep the state budget deficit (APBN) under control amid geopolitical uncertainty and rising energy prices driven by the Middle East conflict.

According to M Rizal Taufikurahman, head of the Centre for Macroeconomics and Finance at Indef, reallocating from less-prioritised spending to more productive expenditures will be key to preserving fiscal space.

“The government can reallocate from less-prioritised spending to more productive spending that directly affects economic stability, including maintaining energy and food price stability,” he said when contacted in Jakarta on Wednesday.

In addition to spending adjustments, Rizal added that the momentum of global commodity price increases — both oil and minerals — should be leveraged to strengthen state revenue from the natural resources sector. In this way, some of the pressures from higher energy import costs can be offset from the revenue side.

This approach is considered important so that the fiscal deficit remains under control without aggressive debt accumulation.

Regarding energy subsidies, Rizal believes adjustments are still necessary, but the policy direction should not merely raise prices or broadly cut subsidies. Reform aiming at targeted subsidies is viewed as fiscally more efficient.

He noted that, to date, some energy subsidies are still enjoyed by middle-to-upper-income groups. He argued that reforms targeting subsidies more directly at vulnerable households and productive sectors would be far more fiscally efficient.

“By doing this, the government can maintain the purchasing power of the lower-income population while also containing subsidy expenditure when world oil prices rise,” he said.

Rizal emphasised that in uncertain geopolitical situations like the Middle East conflict, the government’s primary precautionary step is to balance energy price stability with fiscal discipline. He noted Indonesia remains a net oil importer, so increases in world oil prices immediately raise energy import costs and could widen energy subsidies and energy compensation in the APBN.

In the 2026 APBN, the government allocates energy subsidies at around Rp210.1 trillion from total subsidies of Rp318.9 trillion. However, Indef’s calculations show that escalation of the Iran–Israel–US conflict could significantly raise subsidy needs.

In a mild scenario, energy subsidies are expected to rise to Rp218.1 trillion. If the conflict lasts longer, needs could reach Rp240.98 trillion, and in a severe scenario could surge to Rp278.59 trillion.

“If the war lasts a full quarter, every US$10 per barrel rise in oil would add about Rp25 trillion to the energy subsidy burden,” Rizal said.