Apr 26, 2016 09:00:30
Higher Infrastructure Spending: Where Does The Money Come From?
¨ The government’s energy subsidy reform has allowed it to increase its infrastructure spending since 2015 via saving from the subsidy.

¨ Indonesia’s state budget, however, will likely face downward pressure due to lower-than-expected oil price compared with the budget’s assumption of USD50/barrel. Taking into account our macro assumptions of the government continues its spending in 2016, coupled with the uncertainty of tax amnesty bill to be introduced in 1H16, we project the fiscal deficit to widen to 2.7% of GDP, from last year’s -2.5% of GDP.

¨ Nonetheless, to overcome the income shortfall, the government plans to cut its budget expenditure. This will likely affect the country’s economic growth somewhat, posing a downside risk to our real GDP growth forecast of 5.1% for 2016.

¨ In the short run, excise duties on selected products could be increased, including tobacco, fuel, and vehicles. Over the medium term, tax reform should aim at broadening the tax base and increasing the VAT rate, while tax administration should adopt a risk-based approach to reduce tax evasion.