Indonesia Widens 2026 Budget Deficit Forecast as Tax Revenue Falls Short

JAKARTA, Investortrust.id — Indonesia widened its projected 2026 budget deficit to 2.85% of gross domestic product (GDP), signaling higher government spending while acknowledging that tax collections are unlikely to meet official targets.

The revised outlook marks another sign that Southeast Asia's largest economy is prioritizing fiscal support for growth despite mounting pressure on state revenues and increased spending commitments.

The updated fiscal projections arrive as global investors closely monitor Indonesia's fiscal discipline following the rollout of President Prabowo Subianto's ambitious spending agenda, including the nationwide free nutritious meals program and other development priorities.

While the revised deficit remains comfortably below Indonesia's legal ceiling of 3% of GDP, weaker-than-expected tax receipts underscore the government's long-standing challenge of expanding its revenue base. The issue has gained additional attention after the OECD reported Indonesia has one of the lowest tax-to-GDP ratios in the Asia-Pacific region.

Deficit Outlook Raised

Finance Minister Purbaya Yudhi Sadewa told lawmakers at the House of Representatives' Budget Committee on Tuesday that the government's fiscal deficit is now expected to reach Rp734.3 trillion ($46.2 billion), equivalent to 2.85% of GDP, compared with the original target of 2.68%.

"The 2026 budget deficit is projected at Rp734.3 trillion, or 2.85% of GDP," Purbaya said while presenting the government's first-half fiscal report and second-half outlook to parliament.

Despite the upward revision, Purbaya expressed confidence that the deficit could still narrow before year-end.

"I believe we can still push the deficit lower," he said.

The government also revised its financing requirement upward to Rp734.1 trillion ($46.2 billion) from Rp689.1 trillion ($43.3 billion).

Tax Revenue Misses Target

The Finance Ministry now expects tax revenue to reach Rp2,310.8 trillion ($145.3 billion) this year, or 98% of the official target, while customs and excise collections are projected to reach only 95.4% of target at Rp320.6 trillion ($20.2 billion).

Purbaya said the government would rely on administrative improvements rather than higher taxes to close the revenue gap.

"We can achieve this without raising tax rates or introducing new taxes," he said.

He said reforms would focus on improving tax administration, enhancing the government's Coretax digital tax system, streamlining procedures, and boosting operational efficiency within the Directorate General of Taxes (DGT).

The minister also struck a tougher tone on tax office performance.

"I can now send people home. If tax officers don't perform well, I will send them home," Purbaya said, referring to underperforming employees handling taxpayer services.

He added that while most tax officials had improved, disciplinary measures would remain in place for those failing to meet performance standards.

Government Spending Continues to Rise

State spending is now projected to reach Rp3,942.4 trillion ($247.9 billion), 2.6% above the original budget.

The increase includes an additional Rp132 trillion ($8.3 billion) to finance government obligations, subsidies, and compensation payments.

Ministry and agency spending will rise nearly 8% to Rp1,630.4 trillion ($102.5 billion), while transfers to regional governments are expected to edge up 0.6% to Rp696.9 trillion ($43.8 billion).

Purbaya said the higher expenditure would support national development priorities, stabilize food prices, protect household purchasing power, strengthen regional governments, and fund disaster relief and special autonomy programs.

OECD Highlights Structural Tax Challenge

The revised revenue forecast comes just one day after the Organisation for Economic Co-operation and Development (OECD) reported Indonesia's tax-to-GDP ratio stood at 11.8% in 2024, the third-lowest among 38 Asia-Pacific economies surveyed.

The OECD said Indonesia remained well below the regional average of 19.7% and far behind the OECD average of 34.1%, highlighting the structural challenge facing policymakers seeking to finance rising public spending without increasing tax rates.

Despite the expected annual shortfall, Purbaya pointed to stronger first-half collections as evidence that tax reforms are beginning to deliver results. Tax revenue reached Rp1,035.7 trillion ($65.1 billion) in the first six months of 2026, up 24.6% from a year earlier, led by robust growth in corporate income tax and value-added tax.

"Although Coretax still has weaknesses, it has already made a significant contribution to increasing tax revenue. We will continue improving the system so it becomes easier for taxpayers to use," Purbaya said.