[JAKARTA] From providing free school lunches and milk to slashing the costs of a pilgrimage to Mecca, Indonesia’s three presidential candidates have promised to implement a wide range of policies if they are successful at the Feb 14 election.

These schemes are projected to cost trillions of rupiah each year, and economists have flagged that they will have implications for the country’s fiscal deficit in the coming years.

“From previous experience, a large fiscal expansion can burden the government budget,” said UOB Indonesia senior economist Enrico Tanuwidjaja in a recent note. “The market is waiting to see how far each candidate can realise their programmes (if they are elected).”

Varied proposals

The frontrunner in the three-horse race, Defence Minister Prabowo Subianto, has proposed a scheme to provide free lunch and milk for 83 million people in need every year, including toddlers, students and pregnant women.

The 72-year-old has said during the campaign trail that this initiative is estimated to cost as much as 400 trillion rupiah (S$33 billion) a year, though he claimed the state budget is sufficient to cover this amount. To put the figure into context, the Indonesian government said last year that the total cost to build the new capital city Nusantara in East Kalimantan from scratch was 466 trillion rupiah.

Prabowo – whose running mate Gibran Rakabuming Raka is the eldest son of outgoing President Joko Widodo – has also pledged to help South-east Asia’s largest economy to achieve annual growth of 6 to 7 per cent if he is elected.

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Prabowo’s closest challenger in the race, former Jakarta governor Anies Baswedan, has said he is confident of seeing annual growth of 5.5 to 6.5 per cent over the next five years if he wins. As he works the ground to attract votes, the 54-year-old has repeatedly pledged to boost social assistance schemes.

One of these is a plan to more than double the size of the village fund – a cash transfer aimed at improving the welfare of poorer residents living in rural areas – to 150 trillion rupiah annually, from the existing 70 trillion rupiah that the government allocates each year.

Anies also said recently that he wants to establish an endowment fund using revenue from a planned carbon tax to pay for the development of renewable energy. The fund would be set up with 10 trillion rupiah in seed capital from the state budget, and would finance renewables research and geothermal exploration.

He has also pledged to see how to lower the cost of the Hajj pilgrimage to Mecca, in the wake of a plan by the religious ministry to raise the government-subsidised fee.

The third candidate in the race is former Central Java Ganjar Pranowo, who wants to boost economic growth to 7 per cent per year, to help Indonesia escape the middle-income trap. The 55-year-old also aims to increase the military and defence budget to up to 2 per cent of Indonesia’s gross domestic product, from 0.75 per cent currently.

Indonesian Finance Minister Sri Mulyani Indrawati said in December that the country will raise its defence spending by 20 per cent this year to 387 trillion rupiah, which will be partly funded by foreign debt.

UOB’s Enrico said that while a budget reallocation and debt issuance would be the simplest ways to meet a financing deficit, this strategy would “burden the state budget in the long term”.

In 2023, Indonesia reduced its budget deficit to 347.6 trillion rupiah, equivalent to 1.65 per cent of GDP. The fiscal deficit in 2022 was 2.35 per cent of GDP. Last year was also the first year since 2012 when the government was able to book a primary surplus, which refers to the fiscal balance excluding net interest payments on public debt.

The government has been trying to cut its fiscal deficit to cope with rising borrowing costs globally and better manage its debt after spending heavily during the Covid-19 pandemic.

Tax revenue

Analysts said that increasing the tax-to-GDP ratio would be a sensible way of fulfilling budgetary needs without putting the fiscal balance under pressure.

Former finance minister Chatib Basri said at a seminar in Jakarta on Monday (Jan 29) that a key strategy to achieve revenue targets is to continue the process of tax reforms. “The role of taxation is set to become increasingly strategic in supporting government policies amid these challenging national and global conditions,” he said.

The three presidential candidates have shared similar ambitions to increase Indonesia’s tax-to-GDP ratio, which currently stands at about 10 per cent. This is below the global average of 13.5 per cent, and behind other South-east Asian nations such as Thailand (14.5 per cent), the Philippines (14 per cent) and Singapore (12.9 per cent).

Former trade minister Thomas Lembong, who heads Anies’ campaign team, told The Business Times that Anies intends to increase the ratio to between 13 and 16 per cent by 2029.

Anies also plans to lower income taxes for the lower- and middle-income groups, as well as taxes on education, healthcare and the interest earned from time deposits, said Lembong.

Prabowo has said he intends to increase the tax income from micro, small and medium-sized enterprises (MSMEs) that have not been registered as taxpayers.

Meanwhile, Ganjar has said he wants to impose a tax on carbon and waste products, as well as introduce a progressive luxury goods tax.