What is the big deal if the state budget deficit exceeds 3%? This question is rarely raised openly, as if its sacredness is a commodity that must not be touched. For a long time, the deficit limit of 3% of gross domestic product (GDP) has been treated not merely as an accounting figure, but as an anchor for fiscal discipline and a dogma to assess the government’s credibility in managing fiscal space.
In fact, amid increasingly limited fiscal space and a state budget deficit that nearly touched the threshold at 2.92% of GDP as of December 2025, it is precisely this question that is becoming more relevant to be posed rationally.
Historically, the setting of the 3% limit was a legal product of Law No. 17/2003 on State Finances. It was created with the intention of making the government comply with fiscal discipline. However, must 3% always be adhered to? Looking back at the Covid-19 pandemic era, Indonesia’s fiscal deficits in 2020 and 2021 stood at 6.09% and 4.65%, respectively.
Legally, exceeding this deficit limit clearly surpassed the provisions of the law in force at the time, but the government issued a deficit relaxation policy through Law No. 1/2020 which permitted the breach. The deficit subsequently returned below 3% in the following years up to 2025.
This precedent of relaxation is important to note to emphasize that fiscal policy must be adaptive to the economic context. From an economic perspective, exceeding the deficit limit during the pandemic era did not cause a massive economic collapse. This indicates that the limit does not determine who is right or wrong, but is more accurately understood as a benchmark for the quality of the government’s fiscal policy. The limit should not automatically be used as an indicator of economic collapse, nor should it be turned into a stigma of economic doomsday.
Exceeding the 3% deficit limit is indeed dangerous, but keeping the deficit below 3% without good fiscal policy quality can be far more dangerous.
FOUR PILLARS
The core issue of the deficit actually lies within four main pillars: debt management, government spending, state revenue, and fiscal-monetary coordination. The 3% deficit paradigm must be shifted toward how well the government executes policies related to these four pillars. The first pillar is debt management.
When the deficit must be kept below 3%, debt is no longer just a tool to cover the deficit, but a policy variable that must be managed prudently. Every additional interest burden and every mistake in the timing of debt issuance will directly erode productive spending space and force the government to make adjustments in posts that are relatively ‘easiest’ to adjust.
This trade-off is what must be avoided. The debt financing strategy needs to rely on several core principles, namely that debt management must emphasize the balance between cost and risk (cost–risk trade-off) and debt financing must be tightly synchronized with cash flow projections.
The second pillar lies in government spending. Spending patterns so far have tended to display a backloaded spending character—in other words, spending is cranked up toward the end of the year. This pattern reduces the government’s opportunity to generate an economic multiplier effect from the beginning of the year. Changing this pattern is certainly not easy, but with cross-institutional coordination and mature planning, a front-loading approach is not impossible.
The cutting of transfers to regions (TKD) and the setting of an accumulative local government budget (APBD) deficit limit of 0.11% of GDP also indicate the central government’s seriousness in improving regional spending governance. Without improving the quality of spending, deficit discipline can instead turn into a policy trap that encourages short-term adjustments but sacrifices medium-term fiscal performance.
This is where it is important to read the debt financing policy not only from its nominal side, but also from its design and management. When the deficit cannot exceed 3%, the government does not have much room to be reactive. The financing strategy must be designed anticipatorily, considering debt composition, maturity structure, as well as interest rate and exchange rate risks. The third pillar is state revenue.
An important lesson in 2025 was the presence of a tax revenue shortfall. This indicates that gaps still exist in both the policy gap and compliance gap. Tax governance reform, administrative improvement through Coretax, and data integration to capture new tax bases are expected to boost state revenue. This is non-negotiable, given that state revenue is frequently viewed as something ‘given’, when its contribution to maintaining the deficit is actually immense.
In addition to maintaining the deficit, state revenue also functions as a budget constraint for economic development. The fourth pillar is fiscal and monetary coordination between the Ministry of Finance and Bank Indonesia.
Coordination is key to maintaining stability in the debt market, suppressing risk premiums, and ensuring that deficit financing takes place at an efficient cost without sacrificing monetary policy independence. The coordination between the timing and objectives of policies must be aligned between the two. After all, both must understand when to step on the gas and when to step on the brakes.
GUIDE
In the end, the 3% deficit limit should be regarded as a guide, not the ultimate goal. It is a compass to prevent fiscal policy from overstepping the boundaries of prudence, not an end goal that must be achieved at all costs. A deficit that falls below 3% does not automatically reflect a healthy fiscal policy if it is achieved by postponing productive spending, cutting strategic public services, or through expensive debt management.
Conversely, under certain economic conditions, exceeding 3% actually has the potential to boost economic growth if accompanied by high-quality spending, well-managed financing, and a credible revenue enhancement strategy. In other words, policy quality must be placed above compliance with a number.
Without this shift in perspective, deficit discipline risks turning into a rigid and sticky policy trap. The government will be driven to hold back spending when the economy needs a moderate push, or choose short-term adjustments that are ‘numerically safe’ but structurally expensive. The question that should be raised is no longer merely whether the deficit is below or above 3%, but how that deficit occurs, what it is used for, and how it is financed.
Without the courage to open a more honest and mature dialogue regarding this matter, the 3% limit will only become a symbol of rigid stability—it preserves short-term calm, but potentially sacrifices Indonesia’s development capacity and fiscal resilience in the medium-to-long term. This is not an argument to loosen fiscal discipline, but to position it proportionally.
