Tax Overhaul Puts Indonesia’s Budget Deficit Goals Back on Track
(Bloomberg) -- Indonesia’s planned tax overhaul could raise as much as $17.5 billion in additional revenue and put the government back on track to return its budget deficit under the legal limit.
The bill, which is set to be passed in parliament this week, should generate 120 trillion to 250 trillion rupiah ($17.5 billion) of extra income, said Maybank Kim Eng Research Pte. economists Chua Hak Bin and Lee Ju Ye. That’s equivalent to around 0.7% to 1.5% of gross domestic product.
The government pledged to return its fiscal deficit to 3% of GDP by 2023, from an estimated 5.8% this year, a goal that analysts had doubted as the economy faced slowing growth and delayed tax reforms due to the Covid-19 outbreak peaking in July and August. As the virus situation improves and economic activity picks up, the push for more state revenue is now back on the table.
If the bill is approved, state earnings in 2022 can “surprise to the upside” with the budget deficit coming in lower than the 4.85% target, said Helmi Arman, an economist at Citigroup Inc. “Accordingly, the deadline for returning to the 3% of GDP fiscal cap by 2023 will become more credible.”
The gradual hike in value-added tax should help maintain Indonesians’ purchasing power and keep inflation at bay while boosting state revenue, said PT Bank Mandiri economist Faisal Rachman. Every one percentage point hike in the VAT rate could add 0.2-0.3 percentage points to inflation and slow GDP growth by 0.03-0.05 percentage points.
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