Kicking them whereas they’re down: the phrase aptly illustrates what U.S. President Donald Trump’s tariff bomb does, or is about to do, to Indonesia’s financial system, which has been down for fairly a while. In 2024, in accordance with the Ministry of Manpower, as many as 77,965 staff have been laid off. This, in flip, induced sufficient of a dent within the common family’s buying energy that it set of deflation for five months in a row, from Could to September 2024. The beginning of the year-end vacation season ended this deflation chain, however there was nonetheless a visual lower of vacation spending on the finish of 2024 in comparison with the earlier yr.
Then got here 2025, which began inauspiciously with the last-minute cancellation of the proposed enhance in worth added tax (VAT) by President Prabowo Subianto’s authorities. The injury had partially been achieved, nevertheless, because the pre-emptive inflation previous the proposed VAT had already taken place. It is very important observe that the pre-emptive inflation that occurred on the finish of 2024 and early 2025 was not a results of the earlier deflation interval. As an alternative, it was triggered by market anticipation of the federal government’s plan to lift the VAT charge from 11 to 12 % on January 1, 2025. Crucially, it occurred whereas family buying energy was plummeting.
After that got here the fiscal implication of the Coretax debacle. Coretax is a brand new digital tax system developed by Directorate Common of Taxes, which goals to enhance tax compliance and income assortment. Nonetheless, the system has resulted in technical difficulties throughout taxpayer reporting akin to system crashes and different working points, which noticed a historic collapse in tax revenue, which fell by 41.86 % year-on-year in January, adopted by a 30.19 % decline in February. The federal government responded by attempting to tighten its belt, however the transfer included some very unpopular measures akin to proposed cuts to education funding and a postponement of civil servant appointments for greater than seven months.
In the meantime, the federal government appeared adamant to hold on with applications which are each costly and didn’t encourage market confidence, akin to Prabowo’s free faculty meal program and the formation of the Danantara sovereign wealth fund, which might siphon more cash from the state’s shrinking coffers. Unsurprisingly, the market reacted unfavorably. On March 18, the Indonesia Inventory Alternate dropped by 5 percent lower than three hours after the open, triggering a brief halt in buying and selling.
So even with out Donald Trump slapping a harsh “reciprocal” tariff on imports from Indonesia, the nation’s financial system is already in a foul sufficient form; and whether or not the tariff finally ends up being 32 % or 10 %, it’s about to worsen. To this point, the federal government’s coverage has been insufficient to maintain the financial system afloat. A change of coverage is required to mitigate the approaching disaster.
Sustaining Home Buying Energy
Usually, the traditional Keynesian reply to this drawback would some type of authorities intervention within the financial system. By pumping cash into the financial system via many public work initiatives, the federal government might assist households preserve their buying energy by offering work amid the financial downturn. Nonetheless, there are some caveats to this attainable resolution.
First, the entire level of the federal government intervention on the time of financial downturn is to maintain the financial system going by safeguarding the buying energy of the common family so it shouldn’t fall too low, thus maintaining the demand for items and providers. Subsequently, the federal government has to prioritize expenditures that assist the family consumption, akin to procurement applications which are labor-intensive, direct money transfers, and monetary incentives for small companies.
As well as, whereas Indonesia wants to answer exterior shocks by rolling out extra stimulus, the federal government is closely constrained by its shrinking fiscal headspace, and restricted in its capability to difficulty stimulus packages by itself. Therefore, it might work along with Financial institution Indonesia to difficulty satisfactory ranges of stimulus via a monetary-fiscal coverage combine.
Second, the federal government additionally must reassess a few of its flagship applications such because the free faculty meal program and significant mineral downstreaming program. The previous might assist family buying energy, however not in its present type. Analysis by CELIOS has instructed that distributing the free meal equally to each schoolchild might result in a 34.2 % inclusion error, the place the kids from wealthy households additionally obtain what is meant to be a welfare program for schoolchildren from center and decrease revenue backgrounds. The present faculty meal program additionally depends on huge distributors which have much less affect on the native financial system. Thus, to extend its effectiveness in propping up common Indonesian households’ buying energy, this system must be overhauled by being extra focused and involving native companies extra.
As for the downstreaming program, it must be scaled again. The worldwide market has been thrown into disarray because of Trump’s blanket tariff, and thus it might be unwise to maintain pursuing export-oriented applications on this unsure worldwide setting. The federal government has to prioritize domestically-oriented insurance policies first.
Third, with a view to finance numerous public works initiatives and shore up family consumption, the federal government wants a sturdy and dependable taxation system. The problematic and unreliable Coretax system must be reevaluated, whereas the Directorate Common of Taxes has to strengthen the capability of its personnel.
Final, a particular measure needs to be taken to attenuate unemployment. This might take many varieties, from smooth loans for beginning small companies to particular talent coaching programs for the unemployed. As Trump’s tariffs have induced nice uncertainty within the world market, we can’t anticipate dependable sources of employment from huge non-public sector companies, and due to this fact these measures ought to be targeted on small native companies.
A Chorus, Not a Submission
As a lot as it’s tempting to comply with within the footsteps of China and apply a retaliatory tariff on American items, the federal government has been proper to chorus from doing so, as it might be counter-productive for the financial system and undermine the purpose of sustaining households’ buying energy.
Alternatively, there isn’t any must collapse to Trump’s bullying tactics. The 90-day grace period supplied by Trump is probably going a false hope, the carrot to the tariffs’ stick. A hasty, nearly knee-jerk determination to ship three ministerial-level delegations to Washington, D.C. with a view to appease Trump might be counterproductive in the long term. The seven key factors that Coordinating Minister for Financial Affairs Airlangga Hartarto is reportedly bringing to the negotiation desk sound much less like a nationwide technique and extra like a nationwide capitulation. He has offered zero tariffs for U.S. items and preferential therapy for U.S. firms. This would possibly appease the market in the meanwhile, however within the long-run it’d result in deindustrialization for Indonesia. Worse, the inflow of low-cost agricultural merchandise from the U.S. might slowly strangle our already struggling farmers to demise. A lot for Prabowo’s plan for agricultural self-sufficiency.
What Indonesia can do as a substitute, is to offset the specter of Trumpian tariffs by deepening commerce relations and regional cooperation with different nations. Forging a commerce settlement that lowers the commerce barrier with Indonesia’s main buying and selling companions, together with China and Japan, or rising regional cooperation with fellow ASEAN nations – for example, via vital minerals downstreaming cooperation in intra-ASEAN commerce – are a lot better strikes than both tit-for-tat retaliation or complete capitulation.
Finally, what Indonesia wants is to keep away from kowtowing to Trump’s calls for, whereas endeavor reforms to fix our already battered financial system. The federal government shouldn’t promote the individuals’s future for a short-run achieve; it must re-evaluate its personal home financial coverage first earlier than swiftly providing any concession to a international get together.
