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Summary

This discussion delves into the economic challenges facing Indonesia, highlighting key issues such as tax policy, the informal sector, housing, and demographic trends. Experts emphasize the need for structural reforms to boost tax collection, expand the formal sector, and improve workforce productivity. The housing market, while a potential driver of economic growth, poses risks similar to past crises. Additionally, concerns about declining fertility rates and the quality of human capital are raised, with a call for government action to avoid stagnation and ensure sustainable growth.

Takeaways

• 😀 The government is looking to expand tax policies to include previously untaxed sectors like digital and entertainment.
• 😀 A significant portion (55%) of Indonesia's economy remains informal, making tax collection difficult.
• 😀 The informal sector presents challenges for taxation, with small businesses often reluctant to join the tax system.
• 😀 There is a growing concern that raising taxes on small businesses may burden those already struggling post-COVID.
• 😀 The housing sector is viewed as a potential driver for economic growth but presents risks similar to the US subprime mortgage crisis.
• 😀 High construction costs and rising interest rates complicate the government's ability to leverage the housing sector for growth.
• 😀 There is a notable decline in fertility rates, particularly in urban areas, leading to concerns about future economic productivity.
• 😀 A focus on the quality of the workforce—rather than quantity—will have a more significant impact on economic growth.
• 😀 Structural issues like high labor costs and mismatched skills need to be addressed to enhance Indonesia's productivity.
• 😀 The government must explore new ways to stimulate economic growth to avoid entering a phase of secular stagnation, as economic growth projections are low.
• 😀 There is concern that Indonesia might experience long-term economic stagnation if these structural issues remain unaddressed, making urgent policy intervention necessary.

Q & A

What are the key challenges in Indonesia's current tax system?

The key challenges include a low tax base, with significant portions of the economy, particularly the informal sector, not contributing to tax revenue. The existing tax policies are not effectively capturing the full potential of taxation, as evidenced by the V8 ratio, which is only 50%. Additionally, there is resistance from small businesses and informal sector workers to formalize and pay taxes.

Why is the informal sector a significant issue for Indonesia's taxation system?

The informal sector represents a large portion of Indonesia's economy, with around 55% of economic activity occurring outside the formal system. Workers and small businesses in this sector are typically not registered as taxpayers and are reluctant to formalize due to the financial burden of taxes. This informal economy limits the government's ability to raise revenue effectively.

How can the government address the challenges posed by the informal sector?

The government could start by introducing small tax rates for informal sector businesses to gradually bring them into the formal tax system. The rates should be minimal, starting at around 1-3%, to ease the transition for small businesses that may be struggling, especially in the aftermath of COVID-19.

What is the V8 ratio, and why is it significant in the context of Indonesia's tax system?

The V8 ratio is a measure of how much tax revenue is being captured relative to the potential tax base. In Indonesia, this ratio is around 50%, indicating that the tax system is underperforming and not capturing as much revenue as it could from existing economic activities.

What impact does the informal sector have on Indonesia's overall economy?

The informal sector has a substantial impact on the economy, contributing to 55% of the GDP. However, its dominance creates challenges for formal economic growth, government revenue generation, and the overall efficiency of the economy. If more businesses could transition to the formal sector, it would increase tax revenues and support broader economic development.

Why is the property sector considered a potential driver for Indonesia's economy?

The property and construction sector can have a significant impact on the economy through its supply chain, which includes the production and sale of materials like cement and other construction products. Additionally, large-scale housing development can create jobs and stimulate demand in various related sectors, potentially boosting overall economic activity.

What concerns are raised about the potential risks of relying too heavily on the property sector?

One major concern is the possibility of a housing bubble, as seen in countries like China, where overbuilding and unsustainable property lending have led to economic downturns and 'ghost cities.' In Indonesia, if property development is not carefully managed, it could lead to an economic crisis, especially with rising interest rates and the financial burden on consumers and businesses.

How does the demographic trend in Indonesia affect its economic prospects?

Indonesia is experiencing a demographic shift with decreasing fertility rates, particularly in urban areas. While the population is still growing, the quality of the population, measured by education and skills, is becoming more important for economic growth. A high-quality labor force is crucial for achieving higher productivity and supporting the economy.

What is the significance of human capital in Indonesia's economic development?

Human capital, or the education and skills of the population, plays a critical role in economic growth. A well-educated and skilled workforce can drive productivity, innovation, and overall economic output. The government needs to focus on improving education and ensuring that workers have the necessary skills to meet the demands of the modern economy.

What are the government's economic growth targets, and how realistic are they given the current challenges?

The Indonesian government has set an ambitious target of achieving 8% economic growth. However, this target appears difficult to reach due to structural issues such as stagnating productivity, rising interest rates, and demographic challenges. Current projections from the IMF suggest a growth rate closer to 5%, indicating that reaching the 8% target may require significant reforms and policy adjustments.