Indonesia’s budget balance under the microscope

Indonesia is facing an increasingly pressing situation with a budget deficit of IDR 319 trillion (USD 17.6 billion) for January-September 2026. The question is whether the current administration can keep it under control.

President Prabowo Subianto’s administration has a lot on their plate this year. Recently, Subianto replaced Purbaya Yudhi Sadewa as Indonesia’s Finance Minister with Suahasil Nazara only after one year of service. While investors see this as a concern on fiscal management, some analysts take note of Nazara’s comprehensive understanding of public finance and economics.

The government has so far spent IDR 2.66 quadrillion (USD 147 billion) during the first nine months of 2026, up 19 per cent from the same period in 2025. While this year’s spending momentum has been noticeably faster, these expenditures have been allotted towards Subianto’s priority initiatives as well as personnel and faster goods-and-services spending.

Accelerating public spending

Since Nazara took over his new role, he retained his predecessor’s policy of maintaining a government standby fund worth IDR 299 trillion (USD 17 billion) through July 2027 to enhance borrowing and stimulate economic activity. This is not the conventional approach to fiscal stimulus, but it is an attempt to leverage the government balance sheet to influence financial intermediation: government funds are placed with state-owned banks to ensure there is no gap in available credit within the domestic banking sector. Rather than printing money, this policy encourages banks to finance the private economy and productive credit. In September, Bank Indonesia recorded an 8.3 per cent growth in broad money supply to IDR 10.59 quadrillion (USD 584 billion), primarily driven by disbursed loans.

After the COVID-19 pandemic, Indonesia maintained a 3 per cent ceiling on its fiscal balance which, in turn, limits government debt to below 60 per cent of GDP. Though Indonesia has faced some challenges, it remains to be on par with the budget deficit levels of Thailand, Malaysia, and the Philippines, as seen in Graph 1. However, there have been discussions on tolerating a wider fiscal gap to support an expanded economic agenda. Some argue that increasing the limit will spur Indonesia’s economy and support greater social welfare spending during the energy crisis and to weather other unexpected events. However, others worry that raising the ceiling may undermine market confidence and dampen investment – especially at a time when Indonesia’s stock market is under immense scrutiny.

Nevertheless, the Indonesian parliament enacted the 2027 State Budget on 1 October that puts total government spending at IDR 4.11 quadrillion (USD 227 billion), higher than Subianto’s IDR 4.10 quadrillion (USD 226 billion) proposal on 14 August. The discussion is no longer a matter of simply spending more. As next year’s spending plan translates to a wider fiscal deficit equivalent to 2.4 per cent of GDP, one should ask if the additional public expenditures can realise Prabowo’s 6 per cent growth target.

Budget reprioritisation

This year’s IDR 3.85 quadrillion (USD 213 billion) state budget operates under the assumption that government revenues will reach IDR 3.15 quadrillion (USD 174 billion). However, state revenue amounted to IDR 2.34 quadrillion (USD 129 billion) as of end-September or 74 per cent of the full-year target. In comparison, total government revenue in 2025 amounted to IDR 2.87 quadrillion (USD 158 billion).

Graph 2 shows that budget allocations for regional governments have been reduced from IDR 919.9 trillion (USD 51 billion) to IDR 650 trillion (USD 36 billion), the lowest for the segment in the last five years. According to Subianto, the money allotted for regional development has been squandered and yielded no improvements for the past 25 years. While the central government ensures that the state budget is utilised efficiently and extends direct benefits to all citizens, the regional government takes charge of public services and development at the grassroots level.

Beyond cuts in provincial transfers, allocations for other priority segments are increasing – an indication that the current administration seeks to change the structure of government spending. Still in Graph 2, it seems that the government is pivoting investments towards improving human capital, food security, and national security.

One initiative of note is Subianto’s Free Nutritious Meals program which sought to help students to access adequate nutrition. However, several incidents of food poisoning that have arisen from this program have, instead, done more harm than good. This has led to a call to refocus resources towards vulnerable segments and tighten food safety procedures. The end-goal is to reduce cases of malnutrition and stunting in the country, as well as improve overall quality of life as measured through the global Human Development Index.

Looking into 2027

Indonesia is nearing the 3 per cent deficit limit as it raises public expenditures, though the gap has remained below the ceiling. So far, the government has outlined eight clusters to help strengthen the country’s economy: food security, energy and water, industrialisation, infrastructure, health, education, village development, and poverty reduction.

Indonesia’s fiscal position remains healthy thus far, but a sudden imbalance between public spending and revenues – whether due to a black swan event like a pandemic or a seismic shift in economic policies – could easily lead to a ballooning deficit. Indonesia’s new budget act may become a credibility test of Subianto’s 2027 fiscal strategy. For investors, this could be a measure to assess whether the government’s strategy is financially sustainable – and, to an extent, if Indonesian assets are investable.

If Subianto aims to create a more impactful economic legacy, he must be willing to adjust and compromise on some of his priority areas to ensure that other programs will also be successful in the long term.

This original article has been produced in-house for Lundgreen’s Investor Insights by on-the-ground contributors of the region. The insight provided is informed with accurate data from reliable sources and has gone through various processes to ensure that the information upholds the integrity and values of the Lundgreen’s brand.