2026: A Redistribution Year
Highlights:
· In 2026 State Budget, fiscal deficit was set smaller than previously planned (2026 State Budget: -2.48% of GDP, 2026 KEM PPKF: -2.53%). The +7.33% y-y increase in govt. spending was compensated by +IDR12.76% y-y in tax revenues. The govt. aimed to collect taxation from shadow economy.
· Next year’s spending would be more of centralized spending. While central govt. spending rose by +17.75% y-y, transfer to regions dropped by -24.77% y-y. The govt. aimed for more independent regional capacity.
· Free meal program budget was set higher at IDR335tn (2025: IDR171tn), which mostly are reallocated from the education expenditure.
· While questions have arisen on the govt. effort to lift up the revenue, possible better than expected global financial situation will provide positive surprise for the economy and govt. budget in 2026.
· Execution would be the key, while the main risk for 2026 state budget is its inflationary impact, as most programs are redistributive in nature.
In FY26, fiscal deficit was set smaller-than-expected (2026 State Budget: -2.48% of GDP, 2026 KEM PPKF: -2.53%). Public was paying attention to increase in govt. expenditure (growth: +7.33% y-y) (Figure 1). Allocation for National Nutrition Agency (BGN) rose by +IDR151tn y-y, hitting +IDR268tn with additional IDR67tn reserved in Other Expenditure post (Figure 2). At the same time, Defense Function spending jumped by +IDR90.1tn y-y to IDR335.3tn (Figure 3). To compensate the rising spending, the govt. targeted tax revenues at +12.76% y-y, esp. Non-O&G Income Tax at +15.70% y-y and VAT & Sales Tax on Luxury goods at +11.71% y-y. However, the govt. was not looking for implementing new taxation policies. Aiming to cover shadow economy was the govt.’s objective. It included solving unreported transactions, and business players with no Tax Identification Number (NPWP).
A more focused spending at national level. In K/L spending list, the greatest driver was Nutritious Free Meal program was at IDR335tn (2025: IDR171tn). Transfer to regions, on the other hand, was down to IDR650tn (2025 Outlook: IDR864.1tn). For regional govt., they aimed to improve the regional revenue capacity, while regional spending should become more effective. The central govt., however, would allocate the biggest transfer to the most needed areas.
Indonesia’s growth would be more private-driven. Next year’s growth was targeted at remarkable level of +5.4% y-y. By expenditure group, it seemed that the govt. would rely more on private sectors. Household consumption—together with investment and exports—was set as primary drivers (Figure 4). Social assistance spending grew by +8.6% y-y, dedicated to households. Businessmen, at the same time, would benefit from business efficiency, relaxation, and deregulation plans. On top of that, exports would be driven by product diversification, as well as export-oriented investment. Meanwhile, overall govt. expenditures would grow slower by +4.3% y-y (2025 Outlook: +4.9—5.2% y-y).
We see room for fiscal balance to improve. We see the govt.’s macro assumptions to be totally conservative (Figure 5). Figures assigned to 10yr INDOGB yield and USDIDR were the examples. According to the sensitivity analysis, if the govt. imposed the bond yield at 6.0% and USDIDR at 15,500, ~IDR25.1tn could be saved from the fiscal balance. On top of that, our analysis suggests that ICP could stay at USD67—68/bbl, due to global efforts to increase oil supply. If all things are considered, 2026 Fiscal Deficit may stand at -2.30% instead (Figure 6). Risk for 2026 state budget should be more on its inflationary impact, as most of important govt. programs are redistributive (Figure 7).
Please visit this link to view the full version of this output.
Research Division
PT Trimegah Sekuritas Indonesia, Tbk.
