The Merits and Drawbacks of Taxation (5)

At present, Indonesia faces a complicated set of monetary and fiscal challenges that reflect both internal structural issues and external global pressures. On the monetary side, the country has been struggling to maintain the stability of the rupiah in the face of fluctuating global interest rates, particularly as the United States Federal Reserve continues to adjust its monetary policy. These changes have caused capital outflows and put pressure on Indonesia’s foreign reserves, which in turn force Bank Indonesia to strike a delicate balance between raising interest rates to protect the currency and supporting domestic economic growth that depends heavily on credit expansion. Inflation, although relatively under control compared to past crises, remains a persistent concern, especially in food and energy prices, which are highly sensitive to global supply disruptions.

On the fiscal side, the government faces the difficult task of financing ambitious infrastructure projects and social welfare programmes while maintaining budget discipline. The pandemic left behind a legacy of widened deficits and increased public debt, and while debt levels are still moderate compared to many countries, they continue to rise and create pressure on future fiscal space. Tax revenues remain low by international standards, and efforts to broaden the tax base often clash with political resistance and weak compliance. The government also continues to rely on subsidies, particularly for fuel and electricity, which consume a significant portion of the budget and reduce the room for productive investment. Moreover, the challenge of balancing regional fiscal transfers with national priorities often leads to inefficiencies in how public funds are used, leaving some regions underserved while others receive disproportionate allocations.

Indonesia’s monetary and fiscal policymakers are walking a tightrope: they must maintain stability to reassure investors and avoid financial shocks, while at the same time ensuring that growth does not stall and that inequality does not widen further. The risk lies in leaning too heavily on either side—tight monetary policy may choke domestic demand, while loose fiscal policy may fuel deficits and debt burdens. Navigating this narrow path is the defining economic dilemma Indonesia faces today.

In recent months, Indonesia’s monetary pressures have been most visible in the weakening of the rupiah, which slipped past psychological benchmarks against the US dollar. This depreciation is largely tied to global interest rate differentials, particularly as US bonds remain highly attractive to international investors. Bank Indonesia has had to intervene heavily in the currency market and raise its policy rate, which helps stabilise the rupiah but simultaneously risks slowing down borrowing, consumption, and investment at home. Ordinary Indonesians feel this in the rising costs of imported goods, especially essentials like cooking oil and industrial raw materials that feed into food and manufacturing prices.

On the fiscal side, one of the clearest examples is the government’s continued reliance on fuel subsidies. Despite repeated promises of reform, the subsidies remain politically sensitive and economically costly. When global oil prices spiked, the state budget ballooned as it absorbed the difference between global market prices and what consumers pay at the pump. This created enormous pressure on fiscal space, forcing the government to either cut spending elsewhere or take on more debt. Meanwhile, the collection of tax revenues still lags behind expectations, with efforts such as the VAT increase facing pushback from businesses and consumers alike. Infrastructure projects, which were meant to be a flagship of Indonesia’s growth story, also run into delays and cost overruns, further straining the budget.

Taken together, these realities mean that Indonesia is constantly caught between promises of stability and the economic realities of vulnerability. Both monetary and fiscal levers are being pulled to their limits, yet neither side can deliver a simple solution without causing pain elsewhere. The situation demands policy finesse, but political considerations and global uncertainties make it far from easy.

In the regional context, Indonesia’s monetary and fiscal challenges look both similar and unique when compared to its neighbours. Take Malaysia, for instance: it has also struggled with currency depreciation against the US dollar, but its fiscal space is slightly cushioned by revenues from oil and gas exports, which Indonesia no longer enjoys to the same extent. This means Malaysia can offset some subsidy costs with natural resource earnings, while Indonesia must rely more on borrowing and taxation. Thailand, on the other hand, has been grappling with sluggish growth due to its dependence on tourism, but it maintains relatively stable inflation, giving it more breathing space on the monetary side. Vietnam presents another contrast: its export-driven economy benefits from global supply chain realignments, which strengthen its currency and revenue base, though it still faces the risk of overheating and inflation.

Compared to these countries, Indonesia appears caught in a middle ground: it is not as resource-dependent as Malaysia, not as tourism-heavy as Thailand, and not as manufacturing-driven as Vietnam. Instead, it carries the burden of being a large domestic market that relies heavily on consumption while still aspiring to build infrastructure and industrial capacity. This makes the balancing act between monetary and fiscal policy even more delicate, since any wrong move impacts a massive population and creates ripple effects across the region. Furthermore, Indonesia’s tax-to-GDP ratio remains among the lowest in Southeast Asia, highlighting a structural weakness that limits its fiscal resilience compared to its peers.

While every country in the region faces pressure from global monetary tightening and economic uncertainty, Indonesia’s combination of a huge population, heavy subsidy commitments, and weak revenue base makes its path uniquely difficult. It cannot simply copy Malaysia’s resource reliance, Thailand’s tourism play, or Vietnam’s manufacturing boom. Instead, it must find a model of resilience that matches its own demographic and structural realities.

If Indonesia fails to get its monetary and fiscal policy settings right over the coming months, several plausible scenarios could unfold that would each carry significant economic and social costs. First, continued political or market shocks that undermine investor confidence could prompt renewed capital outflows and a weaker rupiah, forcing Bank Indonesia to spend foreign reserves or tighten policy by raising interest rates; that, in turn, would slow credit, investment, and household consumption and could tip already-fragile growth forecasts lower. 

Second, a persistently weak tax base combined with rising or sticky spending commitments — notably on energy and fuel subsidies — would compress fiscal space and increase the need for borrowing. Higher borrowing needs may push up yields on government bonds, raise debt-servicing costs, and create a crowding-out effect where the government’s debt issuance makes it more expensive for the private sector to invest. That dynamic would also raise the risk of credit-rating pressure if markets begin to doubt the sustainability of public finances. 

Third, a mismatch between monetary tightening to protect price and financial stability and fiscal expansion to support growth could produce uncomfortable trade-offs: tighter monetary settings to defend the currency would depress domestic demand and investment, while looser fiscal stances to stimulate growth would worsen deficits and debt metrics, ultimately undermining long-term investor confidence. The International Monetary Fund and other multilateral institutions have signalled that Indonesia’s growth and inflation outlooks are sensitive to such policy pivots. 

Fourth, the short-term consequence of these macro strains would likely be higher inflationary pressure for households through more expensive imports and energy price pass-through, which would weigh most heavily on lower-income groups and could raise political pressure for populist, short-term policy fixes rather than structural reforms. If policymakers yield to politically costly but economically inefficient measures (for example, re-expanding price subsidies without offsetting revenue measures), the country risks a replay of past episodes where subsidies consumed a large share of the budget and crowded out productive spending.

Finally, if these economic stresses are not managed with credible, coordinated action — preserved central bank independence, credible fiscal anchors, and a clear plan to raise tax effort and reform subsidies — the longer-term risks include slower potential growth, widening inequality, and a weaker ability to respond to future shocks. Conversely, a timely package of measures that stabilises the exchange rate, shields the poor from price shocks while phasing out regressive subsidies, and broadens the tax base could restore confidence, lower borrowing costs, and preserve room for growth-enhancing public investment. 

In policy terms, there are several practical steps Indonesia could pursue. First, strengthening the credibility of monetary policy remains crucial: Bank Indonesia should preserve its independence, maintain transparent communication, and use targeted interventions rather than relying too heavily on blunt interest-rate hikes, ensuring that investor confidence is maintained without choking domestic credit. Second, fiscal consolidation must be pursued gradually but credibly: phasing down regressive energy subsidies while protecting the poorest through targeted cash transfers would release budget space for infrastructure, education, and health investment that has higher multiplier effects. Third, boosting the tax-to-GDP ratio is essential: this can be achieved through broadening the tax base with better compliance and digitalisation of tax administration, rather than relying only on new tax hikes that invite political resistance. Fourth, debt management needs to remain prudent: diversifying funding sources, extending maturities, and avoiding excessive reliance on foreign currency debt would help shield the budget from volatility. Finally, coordination between fiscal and monetary authorities should be institutionalised, so that policies reinforce rather than cancel each other out, creating a stable macroeconomic environment that reassures both investors and households.

Now, let's create a dramatic scenario like "worst case and best case" to clearly visualise Indonesia's future if the steps mentioned above are taken or ignored.

Worst Case Scenario

If Indonesia ignores the need for policy coordination and reform, the economy could slip into a downward spiral. A weak rupiah, fuelled by persistent capital outflows, would make imports more expensive and push inflation higher. Bank Indonesia, under pressure, would hike interest rates further, slowing down domestic demand and choking small businesses that rely on affordable credit. Meanwhile, the government would continue to burn fiscal space on fuel subsidies, leaving little room for long-term investments in infrastructure and human capital. As public debt rises and investor confidence wavers, bond yields would climb, raising the cost of borrowing and putting even more pressure on the budget. Social discontent would grow as food and energy prices squeeze household budgets, creating fertile ground for populist policies that patch problems in the short term but worsen them in the long run. In this scenario, Indonesia risks stagnation: modest growth, higher inequality, and shrinking fiscal resilience, leaving the country highly vulnerable to the next global shock.

Best Case Scenario

If Indonesia embraces reforms and coordination, the picture looks far brighter. Bank Indonesia maintains credibility by keeping the rupiah stable without stifling growth, while fiscal authorities gradually phase out wasteful subsidies and replace them with targeted social assistance. Freed-up budget space would flow into infrastructure, green energy, and digital transformation, driving productivity gains and attracting sustainable investment. Tax reforms and digital compliance tools would lift revenues, boosting the tax-to-GDP ratio closer to regional peers, and making the budget less dependent on debt. With careful debt management, borrowing costs remain contained, leaving fiscal space to respond flexibly to shocks. For households, inflation remains under control, jobs expand in both industry and services, and inequality narrows as social programmes reach those who need them most. In this trajectory, Indonesia secures not only macroeconomic stability but also sustainable, inclusive growth, positioning itself as a resilient middle power in Southeast Asia that can better weather global storms.

The dominant contributor to Indonesia’s state revenue is taxation. According to BPS (Statistics Indonesia), in 2023, tax revenue accounted for approximately 80.32% of total state income, while non-tax state revenue (PNBP) contributed around 19.56%, and grants were negligible at 0.12%. 

Breaking down the 2024 projections: the total revenue was expected to be about Rp 2,781.3 trillion, with tax revenue at Rp 2,307.9 trillion, PNBP at Rp 473.0 trillion, and grants at just Rp 0.4 trillion. 

So, the largest chunk of Indonesia's income comes from taxes, especially corporate and value-added taxes, whereas non-tax income still plays a smaller but meaningful role.

Largest Government Expenditure Categories

Looking at budget allocations gives insight into where the money is being spent:

In the 2023 State Budget (APBN 2023):

• Education received the largest allocation at Rp 612.2 trillion.
• Social protection followed with Rp 476 trillion.
• Energy subsidies and related compensation totaled Rp 341.3 trillion.
• Infrastructure was allocated Rp 392.1 trillion.
• Health received Rp 178.7 trillion.
• Projections for APBN 2024 propose:
• Education at about 20% of the total budget, health at 5.6%, and social protection near 18%. 

Looking forward to the 2025 budget:

Education remains the top priority with Rp 722.6 trillion.

Social protection is next with Rp 504.7 trillion.

Health is allocated Rp 197.8 trillion (~5.5% of spending).

Indonesia’s primary source of revenue is taxation, which makes up around 80% of the total government income, with non-tax revenue (from sources like state-owned enterprises and resource royalties) filling the rest.

On the spending side, the biggest allocations consistently go towards:

• Education (the largest share),
• Social protection programmes,
• Subsidies—particularly for energy and fuel,
• Infrastructure, and
• Health services.

In recent years, PNBP has played an increasingly important but still secondary role in the overall fiscal framework. The largest portion of PNBP comes from natural resource management, particularly oil, gas, and mining royalties, alongside revenues from forestry, fisheries, and geothermal resources. These income streams fluctuate heavily with global commodity prices, meaning that when oil or coal prices are high, Indonesia enjoys a temporary windfall, but when prices collapse, the contribution shrinks sharply. Another significant source of PNBP comes from state-owned enterprises, which pay dividends into the state budget. These dividends, often drawn from companies in the energy, telecommunications, and banking sectors, have become a relatively stable anchor compared to volatile resource royalties. Fees and charges from services such as licensing, administrative processes, and the utilisation of state assets also contribute to PNBP, though these tend to be modest compared with resource-based income.

When comparing across sectors, the extractive industries still dominate, accounting for a substantial share of PNBP, but their importance has been declining as the government seeks to diversify revenue streams. Dividends from state-owned enterprises have become more prominent in recent years, not only as a financial contribution but also as a reflection of government policy to demand greater efficiency and profitability from these firms. Non-resource PNBP, such as from tourism licences, airport fees, or digital spectrum usage, remains relatively small, yet these areas are often cited as potential growth points for the future. This sectoral imbalance illustrates Indonesia’s challenge: its fiscal reliance on commodities is risky, as it ties the budget’s health to volatile global markets, whereas non-resource PNBP has yet to expand enough to provide a reliable buffer.

Thus, the story of PNBP is one of dependence and transition. For now, natural resources and dividends remain the backbone, but long-term stability depends on whether Indonesia can strengthen non-resource revenue streams and reduce vulnerability to the boom-and-bust cycles of global commodity markets.

The global economy is currently presenting Indonesia with a mixed set of challenges and opportunities. On the one hand, the slowing pace of global growth—particularly in advanced economies—creates headwinds for Indonesia’s export sectors. The International Monetary Fund (IMF) has recently lowered its global growth forecast, citing escalating trade tensions between the United States and China, which in turn dampens demand for Indonesian goods. Reflecting this, Indonesia’s growth projection for 2025 has been revised down to approximately 4.7 per cent.

Indonesia’s export performance has also been dampened by an uneven recovery in key trading partners such as the US and Germany, which have recorded sluggish growth or even contraction, thus straining demand for Indonesian products. Meanwhile, persistent policy tightening by the US Federal Reserve continues to weigh on the rupiah, making it harder for Indonesia to attract capital inflows and putting pressure on the currency.

Nonetheless, Indonesia’s economic foundations remain surprisingly resilient despite these global pressures. According to the World Bank, Indonesia continues to benefit from low inflation, robust financial reserves, and adherence to fiscal discipline, helping the economy weather reduced public spending and moderate investment growth. Credit agencies such as Moody’s and Fitch have maintained their stable outlook for Indonesia, underscoring confidence in the country’s capacity to manage external vulnerabilities.

Meanwhile, volatility in global commodity prices remains another significant external risk. Indonesia’s dependence on resource exports means fluctuations in prices—be it for coal, palm oil, or minerals—can cause public revenue swings, complicating budget planning and macroeconomic stability.

Why Not Increase Tax Rates?

The government appears reluctant to burden taxpayers further through elevated rates, likely due to concerns about economic sensitivity and public sentiment. As the country aims to meet higher revenue targets in 2026, policymakers are seeking efficiency gains rather than expanding the tax burden. They expect to meet fiscal objectives through improved enforcement and administrative reforms, reflecting both a commitment to economic stability and political pragmatism. The approach also aligns with maintaining a conducive environment for businesses and investment, particularly in a climate where global economic headwinds may already be weighing on growth.

In recent months, the Indonesian government has signalled its intention to increase borrowing. This policy arises not from recklessness, but rather a strategic response to mounting fiscal pressures and advancing a bold development agenda. Indonesia’s 2025 State Budget envisions a fiscal deficit of around 2.53 per cent of GDP, which must be financed through approximately Rp 775.9 trillion in debt issuance and loans. So far, nearly half of this target has already been drawn down in the first half of the year to ensure that urgent programme funding, such as social assistance and infrastructure, is not delayed. The adoption of this “front-loading” strategy allows the government to lock in funds at a manageable cost amid global uncertainty and safeguard against potential market volatility.

Moreover, the shift toward higher borrowing is partly designed to buffer against external disruptions. Global protectionism, geopolitical tensions, and commodity price volatility have made revenue forecasting difficult and raised downside risks to economic growth. By securing funding in advance, Indonesia can pre-emptively bolster its capacity to respond to shocks while continuing to invest in key sectors such as housing, healthcare, and education.

There is, of course, risk involved. Analysts warn that if debt rises faster than revenue—particularly when tax-to-GDP remains stagnant or falls—there is a danger of “digging a hole to fill another hole,” where borrowing becomes self-perpetuating rather than productive. That said, the government's borrowing for 2025 remains within sustainable bounds—especially when considering that total debt still falls well under the 60 per cent of GDP threshold stipulated by Indonesian law.

In the near to mid-term, it appears unlikely that Indonesia’s national debt in absolute terms will fall; rather, it is projected to remain stable or increase modestly, even as efforts are made to reduce the debt-to-GDP ratio.

Indonesia’s 2026 State Budget targets a lower deficit of 2.48% of GDP, with a vision to reach a balanced budget by 2027 or 2028. The strategy hinges on raising revenues by nearly 10% and maintaining fiscal discipline, though some analysts warn these assumptions may be optimistic.

The OECD notes that gradually increasing government revenue from 2026 onward could place the public debt ratio, currently around 40% of GDP, on a declining path. Meanwhile, S&P Global projects that net general government debt may rise annually by around 2.7% of GDP between 2025 and 2028—suggesting the absolute debt figure will grow, albeit within legal and sustainable limits.

So, while absolute debt might climb, the debt burden as a share of economic output might gradually decline, provided growth and revenue measures proceed as planned.

Can the State Budget Produce a Surplus?

Yes, in principle, Indonesia’s state budget can generate a surplus, though such outcomes are rare and typically temporary. A budget surplus happens when government revenues exceed expenditures in a fiscal year.

For Indonesia, the pathway to surplus would require a mix of stronger revenue mobilisation and tighter control of spending. On the revenue side, this could be achieved by expanding the tax base, improving compliance, digitalising tax collection, and enhancing non-tax state revenues such as dividends from state-owned enterprises, natural resource royalties, and levies. On the expenditure side, it would involve rationalising subsidies, prioritising productive investment in infrastructure and human capital, and cutting inefficient or politically motivated spending.

The government has already signalled an ambition towards fiscal balance, with the 2026 draft budget deficit at 2.48% of GDP, aiming for zero deficit by 2027–2028. If growth remains robust and revenues outperform expectations, a slight surplus could emerge, though it would likely be narrow and short-lived.

However, a surplus is not always the best outcome. Some economists argue that moderate deficits can be healthy, as they allow governments to invest in long-term growth, while surpluses might indicate underinvestment in public services. Thus, the key is not just achieving surplus, but ensuring sustainable fiscal health.

A healthy and stable fiscal position means that the government manages its revenues and expenditures in a way that sustains economic growth, maintains public trust, and avoids unsustainable debt burdens. It does not necessarily mean running a budget surplus every year, but rather keeping deficits at manageable levels, ensuring that debt remains serviceable, and directing spending towards productive sectors.

Fiscal health can be measured through several indicators. First, the budget deficit should remain moderate—large enough to allow strategic investment but small enough to avoid excessive borrowing. Second, the public debt-to-GDP ratio should be stable or declining, signalling that debt is under control relative to the size of the economy. Third, government spending should prioritise long-term growth drivers such as education, healthcare, and infrastructure, rather than wasteful or politically motivated programmes. Finally, revenues should be broad-based and reliable, with efficient tax collection systems and diversified sources beyond volatile commodities.

Stability, in this sense, refers to predictability and resilience. A stable fiscal system can withstand external shocks—such as global recessions, commodity price crashes, or financial turbulence—without causing a fiscal crisis. It also builds confidence among investors and citizens, as people trust that the government will not run out of money or resort to inflationary financing.

Fiscal health and stability are about balance: spending wisely, borrowing responsibly, and collecting revenues fairly.

Let's look at examples of countries that have succeeded in maintaining a healthy and stable fiscal, then compare them with those that have failed.

Successful Examples:

One widely cited example is Sweden. After a severe financial crisis in the early 1990s, Sweden restructured its fiscal framework by adopting strict budget rules, emphasising transparency, and building a large welfare state funded by high but stable taxes. The result has been decades of fiscal surpluses or balanced budgets, a declining debt-to-GDP ratio, and the capacity to spend generously during global downturns without risking bankruptcy.

Another example is Singapore, which runs a highly disciplined fiscal system. The government rarely spends beyond its means, and revenues are diversified between taxes, state investment returns, and fees. Its constitution even prohibits deficit spending over the medium term, ensuring that every budget is balanced across a five-year cycle. This discipline allows Singapore to maintain some of the world’s highest credit ratings and a reputation for resilience.

Failed or Struggling Examples:

In contrast, Argentina illustrates the dangers of fiscal mismanagement. Chronic overspending, reliance on short-term borrowing, and weak tax collection have produced repeated debt crises and hyperinflation. Each attempt to stabilise the economy has been undermined by political pressures to increase subsidies or public wages, trapping the country in a cycle of instability.

Another case is Greece, whose fiscal crisis peaked in 2010. Years of excessive borrowing, inflated public sector spending, and weak tax compliance left the government with unsustainable debt. When global investors lost confidence, Greece was forced into bailouts, austerity, and a decade of economic hardship.

Lesson: Healthy fiscal management is less about avoiding deficits entirely and more about making sure that spending is productive, debt is sustainable, and revenues are reliable. The difference between Sweden and Greece, or between Singapore and Argentina, lies in discipline, transparency, and long-term planning.

Indonesia’s fiscal position today lies somewhere in the middle of those two extremes. On the one hand, it is not as disciplined and rules-based as Singapore or Sweden, but on the other hand, it is far from the chronic instability of Argentina or Greece.

Positive signs: Indonesia’s public debt remains relatively moderate, hovering around 39% of GDP in 2024, which is significantly lower than many developed economies. The government also enforces a legal limit on deficits (maximum 3% of GDP) and debt (60% of GDP), a rule established after the Asian Financial Crisis of 1997–1998. These fiscal “guardrails” act like safety brakes, preventing overspending and keeping investors confident. Moreover, Indonesia has diversified its financing sources, relying not only on foreign borrowing but also on strong domestic bond markets, which reduces vulnerability to sudden capital flight.

Challenges: However, Indonesia still faces risks. A large share of revenue is dependent on commodities like coal and palm oil, making fiscal income volatile. Tax revenues remain low by international standards—around 10–11% of GDP, far below the OECD average. Meanwhile, expenditure pressures are rising, with subsidies, infrastructure projects, and social protection programmes demanding ever more funds. If global conditions worsen—say, if interest rates stay high and commodity prices fall—Indonesia’s deficit and debt servicing costs could quickly expand, pushing it closer to the riskier side of the spectrum.

Conclusion: Indonesia is not in danger of collapsing like Argentina or Greece, but neither has it achieved the fiscal resilience of Sweden or Singapore. Its future depends on strengthening the tax base, managing spending wisely, and reducing overreliance on commodities. With discipline, it could inch closer to the “safe and stable” club; without it, global shocks could expose its vulnerabilities.

When economists and policymakers speak of “fixing taxation,” they rarely mean simply raising rates across the board. Instead, the priority is usually to improve efficiency, fairness, and institutional credibility.

For Indonesia, one of the main issues is the narrow tax base. Many wealthy individuals and large corporations either underreport income or exploit loopholes, while a large portion of the informal economy escapes the tax net entirely. This means that the burden falls disproportionately on salaried workers and small businesses, who have less room to evade. Thus, fixing taxation should start with broadening the base, ensuring that those with the capacity to pay actually contribute.

The second issue is compliance and enforcement. Institutional weaknesses—such as corruption, inadequate monitoring, and outdated digital systems—allow for leakage. Strengthening the Directorate General of Taxes through better technology, data integration, and professional integrity is crucial. The public will only accept higher taxes if they believe the system is fair and not riddled with inefficiencies.

Third, simplification is key. Complex regulations create loopholes and confusion, which discourage compliance. A more streamlined and transparent system reduces administrative burdens both for taxpayers and for the government.

Finally, trust matters as much as technical reform. Citizens will resist taxation if they believe their money is wasted or stolen. Therefore, improving the quality of government spending—showing clear returns in infrastructure, health, and education—can legitimise taxation. In short, fixing taxation in Indonesia is less about squeezing ordinary citizens and more about building institutions that are transparent, efficient, and equitable.

A classic example is the Nordic countries—Sweden, Denmark, and Norway. These nations maintain some of the highest tax rates in the world, often exceeding 40–50% of income, yet their citizens rarely complain about being overtaxed. Why? Because there is trust in government institutions and visible returns on taxation. Citizens know that the money funds universal healthcare, high-quality education, reliable public transport, and strong social safety nets. The perception is: taxes are not taken away, but redistributed fairly, and benefits can be experienced directly by all income groups.

Germany is another case. Its tax system is complex but seen as fairer because it is progressive—higher earners pay more, and in return, citizens enjoy robust public services. Importantly, Germany invests heavily in vocational training and infrastructure, making taxpayers feel that their money strengthens the economy and benefits future generations.

In Singapore, trust comes not from welfare but from efficiency. Tax rates are lower compared to Europe, but compliance is high because institutions are professional, corruption is minimal, and public spending is visible in world-class infrastructure, housing, and healthcare subsidies. Citizens accept taxation as part of a social contract: they pay, and the government delivers tangible, reliable outcomes.

By contrast, in Indonesia, tax compliance is low partly because of weak institutional trust. Many people perceive taxes as unfair—where the wealthy can escape while ordinary citizens cannot. Moreover, taxpayers often feel their contributions do not translate into visible, quality public services. This disconnect feeds resistance: citizens see taxation as a burden rather than a social investment.

Thus, the lesson is clear: people will pay willingly if they trust that the system is fair and that their money is well spent. Building that trust requires institutional reform, transparency, and visible improvements in services.

If Indonesia were to succeed in building public trust in its taxation system, the impact could be transformative. With greater confidence that their contributions are managed transparently and spent productively, citizens and businesses would be more willing to comply voluntarily. This behavioural shift could push Indonesia’s tax-to-GDP ratio upwards from its current 10–11% towards 15% or more, a level closer to emerging market peers. Such an increase would generate hundreds of trillions of rupiah in additional revenue, giving the government more fiscal space to invest in infrastructure, education, healthcare, and social protection without resorting to excessive borrowing. Over time, this virtuous cycle—trust feeding compliance, compliance feeding revenue, revenue feeding services—would reduce the sense of fiscal fragility and place Indonesia on a stronger development trajectory.

By contrast, if trust remains weak, the consequences could be more troubling. Citizens would continue to view taxation as a burden rather than a social investment, leading to evasion, underreporting, and a persistent narrow tax base. This would trap Indonesia in a cycle where revenues stagnate, deficits widen, and debt accumulation accelerates. The government would be forced to rely more heavily on commodities and borrowing, both of which are vulnerable to global shocks. In such a scenario, fiscal stability would become fragile, and the ability to finance long-term development goals—such as universal healthcare or world-class infrastructure—would be compromised.

Indonesia stands at a fork in the road: one path leads to a sustainable fiscal system underpinned by trust, the other to chronic underperformance where distrust continues to undermine state capacity. The difference depends less on tax rates themselves than on whether institutions can convince citizens that their money is in safe and responsible hands.

If the Indonesian government wants to raise trust in the tax system over the next five years, it should begin by making tax administration visibly easier and more reliable for ordinary citizens and businesses. This means accelerating digitalisation so that filing, payment, and dispute resolution can be done through a single, user-friendly platform. When people experience a smooth, low-friction interface, compliance costs fall, and voluntary compliance tends to rise. At the same time, the tax code should be simplified to remove obscure exemptions and close commonly exploited loopholes, while preserving clear, progressive elements so that the burden is distributed fairly according to ability to pay.

Institutional integrity must be addressed in parallel. Strengthening anti-corruption safeguards within the tax authority, introducing strict performance and ethics standards for auditors and inspectors, and rotating personnel in high-risk areas will reduce the perception — and reality — of discretionary enforcement and rent seeking. Publicly publishing anonymised audit outcomes, rulings on tax disputes, and the rationale for major enforcement actions will further create a sense of procedural fairness and reduce the impression of arbitrary treatment.

Transparency about revenue use is as important as collection itself. The government should publish easy-to-understand, regularly updated budget dashboards that show how tax revenues are being spent at national and regional levels, including project milestones and service delivery metrics. Linking specific, visible public goods (for example, the completion of primary schools or community health clinics) to tax revenue flows in communications campaigns will help citizens connect their contributions to tangible benefits. Independent third-party audits and civil society participation in budget oversight will reinforce credibility.

On the revenue side, Indonesia should prioritise broadening the base rather than abruptly raising headline rates. Integrating cross-government databases (tax, customs, land, corporate registries, financial reporting) and expanding digital reporting for large taxpayers will uncover gaps and reduce opportunities for tax avoidance. Targeted efforts to formalise segments of the informal economy and simplified tax regimes for micro and small enterprises can pull more citizens into the system without imposing onerous burdens on small entrepreneurs. At the same time, a well-designed programme of amnesties or one-off regularisations — tightly time-bound and accompanied by clear future penalties for non-compliance — can incentivise declarations while protecting the rule of law.

Spending reform must accompany revenue measures. The government should sequence subsidy rationalisation together with compensating, targeted social protection for the poorest households so that fiscal reform is seen as fair and politically sustainable. Redirecting savings from inefficient subsidies into high-visibility, high-impact investments such as primary healthcare, vocational training, and basic urban infrastructure will produce faster, perceivable returns for taxpayers. Performance-based budgeting and measurable outcome targets will make it easier to show results to the public.

Finally, reform is a political project as much as a technical one, so rapid communication, stakeholder engagement and phased pilots are essential. Launching pilot reforms in selected provinces where visible wins can be achieved, then scaling based on evidence, will create momentum. A sustained public education campaign, co-designed with local governments and civil society, that explains the link between improved services and tax compliance — combined with regular, transparent reporting on progress against clear KPIs — will convert technical reforms into public trust.

If these elements are pursued together — simpler rules, robust digital systems, stronger institutional integrity, transparent spending, and smart, phased implementation — Indonesia could plausibly lift voluntary compliance, broaden its tax base, and materially improve revenues without provoking a political backlash. The process will take time, but success will rest on the government’s ability to show citizens early, tangible returns and to maintain an unambiguous commitment to fairness and accountability.

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