THE Republic of Indonesia’s economy presents a paradoxical picture.
On one hand, the country’s Gross Domestic Product (GDP) stands at an impressive IDR 22,000 trillion, indicating a substantial economic size.
But on the other hand, the Indonesian government’s fiscal capacity remains limited, with revenue collection of only around IDR 2,800 trillion. This discrepancy highlights a significant structural weakness in the current tax system and a lack of effective revenue mobilization.
MSMEs
Micro, Small, and Medium Enterprises (MSMEs) in fact play a vital role in the Indonesian economy, contributing around 60 percent of GDP and absorbing up to 97 percent of the workforce.
However, these enterprises face numerous challenges, including limited access to capital, and weak purchasing power among consumers. As a result, despite their significant contribution to the economy, MSMEs’ fiscal contribution remains far from optimal due to their limited capacity to meet tax obligations.
Indonesia’s tax ratio stands at around 10.08 percent, which is relatively low compared to other developing countries across the globe. This indicates that the government has not been able to optimize tax potential from a broader segment of the population.
The tax system heavily relies on income tax and value-added tax (VAT), which are primarily borne by large and medium-sized formal sector enterprises.
To address these challenges, the Indonesian government needs to adopt a more inclusive and progressive fiscal policy. This is including but not limited to:
- Tax Reform: Implementing a more progressive tax system that encourages economic growth while ensuring a fair distribution of the tax burden.
- Support for MSMEs: Providing incentives and support to MSMEs to enhance their productivity and contribution to the economy.
- Expansion of the Tax Base: Efforts to include the informal sector and MSMEs in the tax net to increase fiscal capacity.
- Improving Purchasing Power Implementing policies that boost domestic consumption and improve the welfare of the population.
The new Indonesian Finance Minister, Purbaya Yudhi Sadewa, faces a complex task in balancing fiscal discipline with economic growth. In order to achieve sustainable economic development, it is crucial for him to focus on:
a. Income Distribution: Ensuring that economic growth benefits all segments of society, particularly the lower and middle classes.
b. Purchasing Power: Boosting domestic consumption through policies that support MSMEs and improve household incomes.
c..Economic Inclusivity: Promoting economic policies that provide equal opportunities for all businesses, regardless of size.
By adopting a comprehensive and forward-thinking approach, the new Minister of Finance can help Indonesia overcome its fiscal challenges and achieve more inclusive and sustainable economic growth.
This requires not only increasing GDP but also ensuring that economic growth translates into improved welfare for the majority of the population.
