Indonesia's Parliament Weighs Easing Fiscal Deficit Cap

Indonesia's parliament on Thursday took up potential changes to the country's fiscal deficit limit, with several lawmakers indicating support for allowing the government to exceed the current ceiling to fund welfare programmes.

The deliberations are part of a broader review of Indonesia's state finance law, which caps the annual budget deficit at 3% of GDP and public debt at 60%. Those limits, introduced after the Asian Financial Crisis in the late 1990s and enacted in 2003, have long been credited with underpinning investor confidence in the country's fiscal prudence.

The spending rules have drawn fresh attention since President Prabowo Subianto took office in October 2024, after making costly campaign promises and setting an 8% economic growth target. His 2025 budget deficit was the widest in more than 20 years, excluding the pandemic period.

At a hearing of the parliamentary financial committee, its head, Mukhamad Misbakhun, said the annual deficit cap had been treated as though it were more sacred than the constitution. He argued that escaping the middle-income trap and lifting 233 million people into higher income would require growth expansion, asking how that could be achieved if the country remained locked to the 3% figure.

Mohamad Hekal, the committee's deputy head and a member of Prabowo's party, agreed the limit should be discussed, saying such restrictions could hinder welfare goals. Harris Turino, a lawmaker from the only party outside the president's coalition, said he would back keeping the ceiling, warning that if Indonesia failed to discipline itself, the market eventually would.

The hearing, still in its early consultation stage, featured presentations from three economists. They said that if lawmakers chose to remove the fiscal limits, other measures to ensure discipline must be introduced, including regulation of the government's debt service ratio or interest payments relative to tax revenues. Chaikal Nuryakin, an economist at the University of Indonesia, suggested setting an average deficit limit over a period such as five or 10 years, allowing flexibility while maintaining prudence.

Harris said it was unlikely parliament would complete its deliberations in the current session, which runs until November. The discussion followed Prabowo's surprise shake-up of the finance ministry's leadership.