Why Indonesia's new government should aim to increase its tax revenue

Summary

The discussion highlights Indonesia's fiscal policy challenges, focusing on the country's low tax-to-GDP ratio and the constraints of its 3% budget deficit law. The speaker emphasizes the need for tax administrative reforms, such as eliminating exemptions and reviewing tax incentives, rather than raising tax rates, to increase government revenue. In a post-pandemic world, expanding the budget to address public health, education, and climate issues is crucial. However, careful attention is needed to maintain Indonesia's global competitiveness while ensuring fiscal sustainability and social protection for vulnerable groups.

Takeaways

• 😀 The maximum allowable budget deficit in Indonesia is currently 3%, as stipulated by law. Any proposed increase in this limit requires parliamentary approval.
• 😀 Emerging economies, including Indonesia, learned from the pandemic that expanding the budget deficit was necessary to address issues such as healthcare, education, and climate change.
• 😀 There is no need to choose between funding social protection or addressing climate issues. The solution is to increase government revenue rather than cutting funding for vulnerable groups.
• 😀 Indonesia's tax-to-GDP ratio is relatively low at around 9-10%, which suggests a need for reforms to increase this ratio and improve fiscal sustainability.
• 😀 The proposed solution to boost government revenue is not to increase tax rates, but to reform administrative systems, particularly in the tax office.
• 😀 A major issue in Indonesia's tax system is the large number of exemptions, which reduce the tax revenue below the expected 11% of GDP.
• 😀 By reducing the number of exemptions, the government could significantly increase tax revenue without raising tax rates.
• 😀 Indonesia's current tax incentives amount to 1.6% of GDP, but their effectiveness has yet to be fully realized. A review of these incentives could also help increase tax revenue.
• 😀 While discussing fiscal policy, it was noted that any new president must focus on maintaining macroeconomic stability and fiscal sustainability while expanding the budget if needed.
• 😀 The emphasis on administrative reform in the tax office is seen as a key step in improving tax collection and ensuring that Indonesia's fiscal policy remains sustainable over time.

Q & A

What is the legal limit for the budget deficit in Indonesia?

The legal limit for the budget deficit in Indonesia is 3% of GDP, as stipulated by the law.

What must happen if a new president wants to exceed the 3% budget deficit limit?

If a new president wants to exceed the 3% budget deficit limit, they must amend the law, which requires approval from the parliament.

Why was the budget deficit expanded during the pandemic in Indonesia?

The budget deficit was expanded during the pandemic to address critical national issues, including health, education, and protection of vulnerable groups, as well as climate-related challenges.

What is the main solution proposed for managing Indonesia's fiscal deficit without cutting social spending?

The main solution proposed is to increase government revenue through tax reforms, rather than cutting social protection or other critical spending.

What is Indonesia's current tax-to-GDP ratio, and how does it compare to the potential?

Indonesia's current tax-to-GDP ratio is about 9-10%, which is significantly lower than the potential 11% of GDP that could be generated through an efficient tax system.

What is suggested as the cause of Indonesia's low tax revenue relative to GDP?

The low tax revenue relative to GDP is attributed to inefficiencies in the administrative system, particularly due to a high number of tax exemptions.

How can the government increase tax revenue without raising tax rates?

The government can increase tax revenue without raising tax rates by reforming the administrative system to reduce exemptions and reviewing the effectiveness of tax incentives.

What role do tax incentives play in Indonesia's fiscal policy?

Tax incentives currently account for about 1.6% of GDP but have not demonstrated significant results. The government should review whether these incentives are appropriate and effective in generating revenue.

Why does the speaker argue against increasing tax rates?

The speaker argues against increasing tax rates because the focus should be on improving the efficiency of the tax system, rather than raising taxes, which could hurt the country's competitiveness regionally and globally.

How could Indonesia's competitiveness be impacted by higher taxes?

Raising taxes could make Indonesia less competitive both regionally and globally, as businesses and investors might seek lower-taxed jurisdictions.