The Dangers of Widening the State Budget Deficit
The option of widening the state budget deficit has emerged following Coordinating Minister for Economic Affairs Airlangga Hartarto’s disclosure of deficit scenarios stemming from conflict in the Middle East. Senior economist at Bright Institute Awalil Rizky stated that this plan risked increasing debt financing and triggering downgrades from international rating agencies.
The Financial Note on the State Budget has already presented a fiscal risk chapter with various assumptions ranging from low probability (score 2) to significant impact (score 5). However, according to Awalil, the Middle East conflict has raised calculations to scores of 4 and 5, with impacts that are difficult to mitigate.
“If the option of widening the deficit is pursued, then financing will exceed the state budget. The impact can almost certainly be expected to be high or very high,” Awalil stated in an official statement released on Monday, 16 March 2026.
Legislation stipulates that the state budget deficit cannot exceed 3 per cent of gross domestic product (GDP). Awalil assessed that widening the deficit would increase the debt-to-GDP ratio, the debt service burden ratio, and the interest payment burden ratio.
The allocation for debt interest payments this year of Rp599 trillion is likely to be exceeded. Given the rise in State Securities yield and currency depreciation due to foreign currency-denominated debt, “other risks facing us include a downgrade in Indonesia’s rating from international rating agencies,” Awalil said.
Even before the discussion of widening the deficit, two global rating agencies, Moody’s and Fitch Ratings, had criticised fiscal policy that was becoming increasingly imprudent, as well as the high debt interest payment ratio. Amid these assessments, both agencies also downgraded the prospect of state securities from stable to negative.
If the deficit is widened and approved by Parliament, serious problems will emerge. “The deficit must be addressed with increased debt financing, meaning the government needs to borrow more,” Awalil said.
Latest data from the Directorate General of Financing and Risk Management (DJPPR) stated that government debt as of 31 December 2025 had reached Rp9,637.90 trillion. This figure jumped compared with the first half of 2025, when government debt was recorded at Rp9,138.05 trillion.
The debt-to-GDP ratio as of 31 December 2025 was recorded at 40.46 per cent. This also increased compared with the first half of the year, which was 39.86 per cent of GDP.
Awalil stated that President Prabowo Subianto’s desire to cut spending more efficiently, if implemented consistently, would certainly help address some of the problems. However, it is unlikely to be sufficient for the current situation.
Another option available with more measurable risk is to cut large budget priority programmes, including free nutritious meals, Red and White Village Cooperatives, purchases of major weapons systems and special material equipment. If necessary, government bureaucracy could be restructured, such as reducing the number of ministries and agencies.
Despite the benefits of these programmes, preventing harm is currently prioritised. “Adding to the deficit and borrowing massively is not the right choice,” he said.
Previously, Airlangga Hartarto presented three worst-case deficit scenarios to President Prabowo Subianto during a cabinet meeting at the State Palace in Jakarta. According to his calculations, under conflict conditions, the state budget deficit could reach 3.18 per cent to 4.06 per cent of GDP.
“This means that with these various scenarios, maintaining a 3 per cent deficit is difficult unless we are willing to cut spending and reduce economic growth,” Airlangga said on Friday, 13 March 2026, citing the Presidential Secretariat’s YouTube channel.