NEXT Indonesia assesses fiscal challenges regarding State Budget's leverage on the economy

The NEXT Indonesia Center assesses that the greatest future fiscal challenge for Indonesia is ensuring that the State Budget (APBN) maintains its leverage on economic growth, rather than merely focusing on keeping deficits low and debt ratios within safe limits.

Ade Holis, Lead Researcher at NEXT Indonesia Center, noted in Jakarta on Sunday that capital expenditure is a vital instrument for increasing economic capacity, productivity, investment, and future state revenue. He explained that if the space for capital expenditure continues to narrow, the State Budget’s ability to drive economic growth could potentially weaken.

Data shows that the proportion of capital expenditure relative to total central government expenditure has been on a downward trend, falling from 16.49 per cent in 2017 to just 8.70 per cent in the 2026 State Budget, even as overall central government spending continues to rise. Simultaneously, the proportion of debt interest payments has increased; from 17.12 per cent in 2017, it rose to 21.24 per cent in 2025, before projected to drop to 19.03 per cent in 2026.

Ade Holis suggests this indicates an increasing amount of fiscal space is being absorbed to meet past obligations rather than financing productive future investments. He argues that the government needs to reorient spending to prevent the State Budget from becoming overly defensive, noting that routine and less productive expenditures must be controlled to preserve space for productive public investment.

NEXT Indonesia Center conducted a study measuring Indonesia’s fiscal sustainability for the 2017-2026 period using the approach developed by Craig Burnside in the World Bank publication ‘Fiscal Sustainability in Theory and Practice’. This method measures the government’s ability to maintain its fiscal position by comparing the actual primary balance against the threshold required to keep the debt ratio under control.

The study found that Indonesia was in a sustainable fiscal category during the 2017-2019 period. However, this condition was disrupted during the COVID-19 pandemic in 2020 and 2021, leading to economic contraction, a surge in financing needs, and a widening deficit, which pushed Indonesia’s fiscal position out of the sustainable zone.

According to Ade Holis, the pandemic period was the greatest test for Indonesia’s fiscal health in the last decade (2017-2026). Nevertheless, a relatively rapid economic recovery has successfully returned the fiscal condition to a healthier path. “The pandemic placed extraordinary pressure on the State Budget. However, since 2022, the fiscal position has improved alongside recovering economic growth, more controlled inflation, and improvements in the government’s primary balance,” he said.

The study shows that in 2023, Indonesia recorded its strongest fiscal position during the observation period, with a primary balance surplus of 0.49 per cent of GDP, compared to a sustainability threshold of -1.85 per cent of GDP. This improvement is projected to continue through 2024 to 2026. In 2026, the actual primary balance is expected to be at -0.35 per cent of GDP, which remains better than the sustainability threshold of -1.74 per cent of GDP.

Despite this, NEXT Indonesia Center warns that Indonesia’s fiscal safety margin is not yet fully robust, as evidenced by the negative primary balance projections for 2025-2026 and the rising nominal government debt. “Indonesia’s fiscal condition is indeed sustainable, but it does not mean it is risk-free. Fiscal space must be maintained because new shocks, such as rising global interest rates, economic slowdowns, or currency depreciation, could narrow this safety margin,” said Ade Holis.

The NEXT Indonesia Center concluded that while Indonesia’s current fiscal foundation remains relatively strong, long-term fiscal sustainability will depend on the government’s ability to maintain the quality of state spending, strengthen revenue, and ensure every rupiah of the budget generates higher economic growth in the future.