Fiscal Space is Getting Narrow in the Middle of the Rapid State Spending

Indonesian economy (Photo: Antara)

JAKARTA - The World Bank (World Bank) assesses that Indonesia's fiscal space is narrowing as funding needs for various government priority programs increase and the burden of subsidies increases due to high world energy prices.

In its June 2026 edition of the Indonesia Economic Prospects report, the World Bank projects the government budget deficit will remain at 2.8 percent of gross domestic product (GDP) in 2026 and 2027, before falling slightly to 2.7 percent in 2028.

According to the World Bank, pressure on the state budget comes from the combination of the magnitude of the subsidy spending needs and the implementation of government priority programs that require large amounts of budgetary support.

"The deficit is expected to remain high at 2.8 percent of GDP in 2026, reflecting the combined pressure of increasing subsidy spending and large-scale priority programs," the World Bank wrote in its report, quoted Friday, June 12.

The World Bank also assessed that government consumption is still one of the main pillars of national economic growth amid an unstable global condition. However, dependence on government spending is considered to have risks because the government's fiscal capacity is increasingly limited.

The institution estimates that government spending will continue to increase as a result of the implementation of a number of priority programs, and at the same time, the increase in world oil prices has the potential to increase energy subsidies so as to narrow the fiscal space of the government.

"Dependence on government consumption contains risks given the limited fiscal space and increasing subsidy costs in the midst of fiscal rules regulated by law," he said.

In addition to pressure from the spending side, the World Bank projects that the burden of paying government debt interest will also continue to increase in the coming years.

Meanwhile, the interest payment ratio to state revenues is expected to rise from 18.7 percent in 2025 to 19.2 percent in 2028, and this shows the increasing proportion of state revenues that must be allocated to pay interest on debt.

The primary deficit is also expected to still occur with an average of around 0.4 percent of GDP throughout the period 2026-2028, and this condition is considered to be able to encourage a gradual increase in government debt.

However, the World Bank estimates that state revenues will begin to improve in the next few years, driven by the completion of tax restitution arrears and the beginning of the results of tax administration reforms.

In addition, the high prices of a number of Indonesia's main export commodities such as coal, LNG, nickel, gold, and palm oil are expected to be able to provide additional state revenues in the short term.

In addition, the positive impact of the increase in commodity prices is projected to reach around 0.4 percent of GDP so that it can help relieve some of the fiscal pressure.

The World Bank assessed that broad subsidy policies can indeed maintain people's purchasing power in the short term. However, this policy also risks reducing the fiscal space that should be used for public investment, more targeted social protection, and reforms to increase economic productivity.