Three Consequences if Budget Deficit Ceiling is Raised
Dipo Satria Ramli, an economist at the Centre of Reform on Economics (CORE) Indonesia, has warned that raising the state budget deficit ceiling above 3 per cent of gross domestic product (GDP) would trigger three major consequences: a downgrade in sovereign debt ratings, capital outflows, and a crowding-out effect on private investment.
Global rating agencies Fitch Ratings and Moody’s have already downgraded Indonesia’s sovereign outlook, with fiscal risk including widening budget deficits among their primary concerns. “If there is no improvement within 18-24 months, there is a strong likelihood that the sovereign rating itself will be downgraded,” Dipo stated during an online discussion on 17 March 2026 titled “Scrutinising Plans to Widen the Budget Deficit Ceiling.”
Such a downgrade would have substantial economic consequences. Bank lending costs would rise and financing the deficit would become more difficult due to increased debt servicing costs.
The second risk is capital outflow. Raising the deficit ceiling risks prompting investors to withdraw funds, weakening the rupiah and triggering inflation. This would reduce purchasing power, particularly affecting lower-income households.
The third consequence is the crowding-out effect, which occurs when increased government spending, particularly financed through debt, leads to a decline in private sector investment. If the deficit is raised, the government would likely need to absorb higher levels of debt. This would siphon liquidity from financial markets that should be available for private use. “Ultimately, credit for micro, small and medium enterprises and the private sector dries up,” Dipo noted.
The State Finance Law currently sets a maximum budget deficit of 3 per cent of GDP. The proposal to raise this threshold was initially suggested by the Coordinating Minister for Economic Affairs, Airlangga Hartarto, after he outlined three worst-case deficit scenarios resulting from the Middle Eastern conflict. He also prepared the option of issuing a Government Regulation in Lieu of Law (Perppu).
Finance Minister Purbaya Yudhi Sadewa stated that the government has not yet decided to adopt this option, noting that the current budget remains in a safe condition. “If oil prices remain high for an extended period, then we will recalculate the budget situation, but we will not immediately issue a Perppu,” he said in Jakarta on 16 March 2026.