By Adrian N. Perwira – Economics Researcher, GREAT Institute
Published in Kompas, August 28, 2025
On Friday, August 15, 2025, President Prabowo Subianto presented the 2026 State Budget (RAPBN), with a deficit of 2.5% of GDP and a target of a balanced budget by 2027 or 2028. Book II of the 2026 Financial Note also sets the debt ratio for 2026 at around 40% of GDP, assuming economic growth of 5.4%. In 2024, the debt ratio had reached 39.2% of GDP (IDR 8,680 trillion) and is projected to reach 41.2% in 2025 (assuming 5.1% growth and a 2.8% deficit). Post-pandemic, the debt ratio has shifted into a new regime, rising by about 9 percentage points above pre-pandemic levels and remaining stable at a high range (39–41%). While this is still well below the legal ceiling of 60% of GDP, it does not mean it is risk-free.
The first signal comes from the burden of interest payments. By the end of 2025, government debt interest payments are projected to reach IDR 552.1 trillion, equivalent to 15.6% of total state expenditure outlook and 19.3% of state revenue. This means that before financing priority programs, a significant portion of revenue is already absorbed by interest payments—almost one out of every five rupiah of state revenue.
The debt portfolio structure is relatively reassuring on one side: around 88.12% is in the form of government bonds (SBN), mostly denominated in rupiah, reducing currency risk. The remaining 11.88% consists of foreign loans (a mix of bilateral—Japan, China—and multilateral sources). However, Bank Indonesia’s warning about potential “crowding out” must be taken seriously. As of the end of July 2025, domestic investors hold 85.4% of SBN, with Bank Indonesia holding 24.2% and banks holding 20% of tradable SBN. If banks become marginal buyers as issuance increases, the term premium (the yield gap between the 10-year SBN at 6.44% and the BI rate at 5.25%) may widen, potentially constraining private credit. In other words, a structurally safe foreign exchange position does not automatically mean low economic cost.
Fiscal Condition
BPS reported year-on-year economic growth of 5.12% in Q2 2025. Indonesia’s fiscal position is relatively strong to support the reduction of the budget deficit from 2.8% of GDP (IDR 522 trillion) to 2.5% in 2026. This growth supports the tax base, particularly VAT from stable domestic consumption and corporate income tax from manufacturing, trade, and services.
On central–regional fiscal relations, the adjustment of the Regional Transfer (TKD) budget must be handled carefully. Without safeguards for mandatory spending (education, health) and regional capital expenditure, TKD reductions risk weakening basic services and delaying high-return small projects, thereby slowing local economic activity.
The latest outlook shows weakening fiscal discipline: the 2025 primary balance was revised to a deficit of IDR 110 trillion (from IDR 63 trillion in the state budget law), worsening by around IDR 90 trillion compared to 2024 realization. The main driver is declining revenue while expenditure remains high, making debt stabilization increasingly dependent on the primary balance and the gap between interest rates and economic growth.
The quality of spending determines whether debt becomes a growth accelerator or a recurring burden. A World Bank study states that only 55% of Indonesia’s debt is linked to productive sectors. This means the “golden rule of public finance”—borrowing for investment rather than consumption—is not yet fully upheld. Debt-financed projects must reduce logistics costs, expand the future tax base, and strengthen export capacity to ensure debt supports growth.
Externally, conditions are also challenging. With the Fed maintaining interest rates at 4.25–4.50% and no strong expectation of easing, refinancing costs for foreign currency debt remain high. Rupiah depreciation beyond IDR 16,000 per USD would increase foreign debt servicing pressure and trigger imported inflation risks. In such conditions, fiscal discipline becomes not just a preference but an economic insurance mechanism. Domestically, the largest pressure remains energy subsidies, projected at around IDR 350 trillion in 2025.
International institutions echo similar concerns. The IMF encourages strengthening the tax ratio (currently around 10.3% of GDP) and subsidy reform. Fitch maintains Indonesia’s BBB rating but highlights fiscal vulnerability if debt trends rise further. Bank Indonesia also warns about crowding out effects. The common message is clear: fiscal credibility is the anchor of macroeconomic stability and must be reflected in auditable policies such as the primary balance, realistic deficit ceilings, and transparent project pipelines.
Fiscal Recommendations
What should the government do?
First, strengthen revenue through genuine tax base expansion, not merely tax increases. The Finance Minister stated that the 2026 priority is not new tax rates but system reform, particularly Coretax. However, its rollout has faced issues (system disruptions and incomplete data migration), which must be addressed to ensure revenue targets are realistic. Further revisions of the Harmonized Tax Law should capture the digital economy and promote MSME formalization without creating disincentives.
Second, improve the productivity of spending. This requires independent feasibility studies, ROI benchmarks, cost–benefit analysis, and a stage-gate system allowing project termination if performance targets are not met.
Third, active debt management. In a high interest rate environment, extend SBN maturities (including 20–30-year bonds), and optimize domestic and regional investors such as retail investors, pension funds, insurance companies, and sukuk markets.
Fourth, restructure energy subsidies into targeted and time-bound assistance. Shift from price subsidies to direct beneficiary subsidies based on a cleaned DTKS database.
Fiscal risks in 2025 must be managed through clear scenarios. In an optimistic scenario, tax reforms succeed, commodity prices stabilize, and the rupiah remains stable, allowing the debt ratio to fall below 40% within 2–3 years. In a pessimistic scenario, global slowdown, dollar strength, and commodity corrections could push the ratio above 43%, increasing currency pressure. The difference between these paths depends mainly on three factors: spending discipline, revenue effectiveness, and government communication credibility.
