Pacific Money | Economy | Southeast Asia

Indonesian Parliamentary Committee Debates Changes to Fiscal Deficit Limit

Some lawmakers say that the current administration should have the right to a 3 percent ceiling in order to support its expansive economic agenda.

Indonesian lawmakers have begun debating potential changes to the country’s fiscal deficit ceiling, with several ‌lawmakers arguing yesterday that President Prabowo Subianto’s administration should have the right to exceed the current limit in order to fund its ambitious welfare policies.

During a public hearing in Jakarta yesterday, the House of Representatives’ Commission XI debated a series of revisions of the State Finance Law. Passed in the wake of the Asian financial crisis of 1997-1998, the law sets a maximum budget deficit of 3 percent of gross domestic product and limits government debt to 60 percent of GDP.

Mukhamad Misbakhun, chairman of the House of Representatives’ Commission XI, told the hearing that the deficit limit should not necessarily be treated as a rigid annual threshold if the government needs additional fiscal space to support economic growth.

“Is 3% really ‘sacred’?” said Mukhamad, according to a report in the Jakarta Globe.

Misbakhun, who is also a lawmaker of the Golkar Party, a member of Prabowo’s expansive coalition, proposed that the law be revised to establish clear conditions under which a larger deficit could be permitted, such as when tax revenue is weak, or state energy subsidies rise due to a spike in global energy prices – as happened in Indonesia after the outbreak of the U.S.-Israel-Iran war earlier this year.

“We have the momentum to get out of the middle-income trap, ​take 233 million people out of middle income and head to high income,” Misbakhun said, according to Reuters. “That needs growth expansion. How ‌are ⁠we going to expand growth if we lock ourselves and always talk about 3 percent?”

Mohamad Hekal, deputy head of the committee and a member of Prabowo’s party Gerindra, agreed that changes to the budget deficit ceiling should be discussed.

While a deputy finance minister said yesterday that the government is committed to keeping the 3 percent ceiling in place, the ongoing parliamentary debates are likely to be watched closely by institutional investors.

The State Finance Law was passed in 2003, as Indonesia was pulling itself up from the economic rubble of the Asian financial crisis, the political reverberations of which brought down the three-decade-long reign of President Suharto.

As one scholar noted at the time, the law marked “a major step forward in Indonesia’s drive to establish a sound system of public finance management and realize good governance.” More importantly, perhaps, the law was intended to reassure foreign investors that the country would maintain a disciplined fiscal policy after the chaos and corruption of the late Suharto........

© The Diplomat