Lower fiscal deficit in 2026. The government proposed a significantly lower fiscal deficit of 2.5% of GDP in 2026 vs 2.8% in the 2025 budget outlook. This is consistent with the preliminary proposed fiscal deficit range of 2.48-2.53%. However, this mainly reflects an optimistic revenue target to support more aggressive government spending. In line with this, the NGDP growth target is set higher at 8.2% in 2026 vs an expected 7.4% in 2025, which is consistent with the GDP growth target of 5.4% from 4.7 5.0% this year.
Higher and more centralized budget. Government spending is set to increase by 7.3% vs a 5% increase in the 2025 budget outlook. The rise mainly reflects higher material, personnel, and other spending. While central government spending is expected to pick up sharply by 17.8%, transfers to regions are projected to fall by 25%, reflecting a more centralized budget due to a lower revenue-sharing fund. Excluding debt service, government spending is set to rise by 7.1% vs 3.6% in 2025.
Larger populist spending. The free nutritious meal budget almost tripled to IDR335tn from IDR116tn this year, covering a total of 82.9mn recipients vs 20mn to date. In addition, personnel spending is set to rise by 11.6%, likely reflecting new hiring. The social protection budget is expected to increase by 8.6%, accounting for 13% of the total, underscoring that the budget remains populist. The increase reflects higher social assistance and subsidies, particularly energy, which are set to rise by 14.2%.
Larger defense spending but lower capex. While the budget allocation for the Defense Ministry is lower, total defense spending is projected to rise sharply by 36.7%, reflecting larger reserve allocations. As a result, capital expenditure is set to decline by 20% after a 1.6% increase in 2025, although this could be revised upward if the defense budget reserve is utilized. The allocation for the Ministries of Public Works, Transportation, and Housing, which serve as proxies for infrastructure spending, is set to increase. However, the new capital city development budget is set at IDR6.3tn, representing a 53% decline.
Ambitious revenue target. Revenue is targeted to rise sharply by 9.8% from 0.5% in 2025, driven by higher tax collections, which are expected to increase by 12.8% (well above the NGDP growth target). The MOF cited plans to leverage core tax systems, digital tax, tobacco excise policy, and the extensification of excisable goods. Non-tax revenue is projected to decline by 4.7% after 17.7% contraction, reflecting a further drop in SOE dividends.
Higher financing and below-the-line spending. Despite a lower deficit, net debt financing is set to rise to 3.1% of GDP from 3% in 2025, reflecting higher below-the-line spending of IDR203tn vs IDR139tn in 2025. This is mainly driven by injections into SOE banks amounting to IDR83tn to support village cooperatives. Capital injections to SOEs/Danantara are expected to increase to IDR41.5tn from IDR38.9tn previously. Financing from the excess cash balance (SAL) is set at IDR60.4tn vs IDR86.6tn this year.
Our view. We maintain our fiscal deficit forecast at 2.6% of GDP in 2026, slightly higher than the proposed budget. We expect a revenue shortfall of 5%, implying tax revenue growth of 7.1%, which is more consistent with NGDP growth outlook. This already factors in underspending, with an assumed realization rate of 97%. Gross financing is expected to be higher but could be reduced, as we expect the government to utilize more excess cash balance (SAL) financing. Another debt switch of the maturing burden-sharing bonds with BI also cannot be ruled out.
