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Jokowi needs a more realistic tax target

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In Brief

Once again President Joko Widodo has reshuffled his cabinet. One pleasant surprise is the return of Sri Mulyani Indrawati, who until recently was Managing Director and Chief Operating Officer of the World Bank.


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She accepted the offer to serve as the Minister of Finance, replacing Bambang Brodjonegoro who now leads the Ministry of Planning.

This decision is commendable. Mulyani — who assumed the same post under former president Susilo Bambang Yudhoyono from 2005 to 2010 — has a good track record. Euromoney named her Finance Minister of the Year in 2006 and Emerging Market ranked her as Asia’s Best Finance Minister in 2007 and 2008.

But the challenges that Mulyani faces this time round are more daunting. The most immediate of these are the country’s budget posture and its tax amnesty program.

Indonesia has a very low tax-to-GDP ratio of 11 per cent — as compared to the Philippines’ 13 per cent and Malaysia and Thailand’s 16 per cent — which severely constrains the government’s ability to finance public expenditure. This is a major issue for Joko Widodo’s development agenda, which is heavy on infrastructure — an industry that requires huge amounts of funding — especially as the incentives for the private sector are lacking.

Against this background, the administration has come up with a herculean budget plan. The government has announced a tax revenue target of 1539 trillion rupiah (approximately US$117 billion) for the 2016 budget, implying a 24 per cent increase from the 2015 collection. This is an overly ambitious target, given that in the past three years’ tax revenue growth has never reached 10 per cent. This isn’t the first time that the Indonesian government has set unrealistic targets. In 2015, the tax revenue target was set at 30 per cent growth from 2014 levels but it only realised 8 per cent growth, creating a record shortfall of almost 250 trillion rupiah (approximately US$19 billion).

Fortunately, it appears that Mulyani has seen through this miscalculation. She expects to see a shortfall of 219 trillion rupiah (approximately US$17 billion) this year. If she is correct, the tax collected will only amount to around 1320 trillion rupiah (approximately US$100 billion) implying a much more realistic 6.4 per cent increase from what was collected in 2015.

As for the 2017 budget, Mulyani has proposed a target of 13 per cent growth in tax revenue (to around 1495 trillion rupiah or US$113 billion). But if tax revenue grows at the more ‘normal’ rate of 8–9.5 per cent, then the realised tax revenue will be around 50–70 trillion rupiah (approximately US$4–5 billion) short. The reason for this discrepancy is perhaps Mulyani counting on returns from the tax amnesty program — another issue that Mulyani must deal with.

The tax amnesty program was first rolled out in 2008 under the name of the ‘sunset policy’. It was aimed at widening the tax base and increasing the tax ratio. By the end of that year, tax revenue exceeded its target by almost 50 trillion rupiah (approximately US$4 billion). Based on its success, the current Indonesian government has introduced a new tax amnesty program that focuses more on repatriating Indonesians’ assets from abroad and includes both waives on sanctions and reductions in the principal amount to be taxed. This is much more complicated than the first sunset policy, which only focused on waiving sanctions and interest.

In her first month back in office, Mulyani has tried to mitigate some of the potential risks of this complicated program and put forward some more realistic tax targets. Hopefully by managing expectations on the effectiveness of the tax amnesty program, Mulyani can improve the country’s fiscal credibility even further.

But the Ministry of Finance is not just about tax collection. Reform of the entire tax system and bureaucracy were previously among Mulyani’s top priorities and this focus will hopefully re-emerge. Other priorities should include improving how village and healthcare funds are managed.

Mulyani’s reappointment to the Ministry of Finance is a positive step for the Indonesian economy. Hopefully, she can help Indonesia successfully navigate its economic challenges and implement much-needed reform.

Arianto A. Patunru is a fellow at the Crawford School of Public Policy, The Australian National University.

5 responses to “Jokowi needs a more realistic tax target”

  1. When one reflects that the cabinet reshuffle bringing Sri Mulyani back to the Finance portfolio was the second that Jokowi carried out in less than two years, one is strongly tempted to rewrite the title of this otherwise very persuasive post as ‘Jokowi needs a more realistic cabinet performance target’.

    The distinguished author of the post notes that former Finance Minister Bambang Brodjonegoro ‘now leads the Ministry of Planning’. But he has neglected to point out that Bambang is the third minister in this portfolio since Jokowi’s inauguration as president on 20 October 2014.

    One wonders what failings Jokowi detected in Bambang’s two predecessors in that post in such a short time. Furthermore, what kind of ‘planning’ can be implemented or devised when ministers in charge of it are moved about so frequently?

    Another minister, Sofyan Djalil, is in his third economic portfolio since Jokowi became president. And he had already held one or more different economic portfolios under SBY.

    At the time of the reshuffle, Jokowi appointed as his second energy and mineral resources minister a man who had an American passport. This was the result of grossly inadequate screening. Jokowi was obliged to sack in a matter of weeks, and he is now looking for a third minister for this portfolio.

    Jokowi also has a third maritime affairs coordinating minister in his current line-up. His demotion to this post from the more senior position of coordinating minister for political, legal and security affairs made it possible for the old Soeharto loyalist, Wiranto, to come back to cabinet. He is in turn the third occupant of this post in less than two years.

    Sri Mulyani’s appointment stood out in the latest reshuffle as one that was clearly related to merit rather than to narrow political advantage for Jokowi. But, unless her boss acquires a more sophisticated understanding of how government works, she will have her work truly cut out for her.

    • Ken: Thanks for your thoughtful comments. I agree with most of them. Initially I wanted to write about the cabinet reshuffle – then I found out there had been many op-eds on that issue out there. In addition, I wanted to focus more on the budget (and more specifically the tax target). I’m hoping to write about other aspects that you mentioned next time. Thanks.

      • Pak Arianto, I look forward to whatever future writing on this subject you plan to undertake. If I were you, I wouldn’t be put off by the fact that there has been a lot of commentary on the reshuffle. An analysis of this subject by a prominent Indonesian economist would unquestionably be of great value.

        I realise that my comment on your post was shifting the spotlight a little away from your own focus, bringing it a little closer, perhaps, to my own arena. But I thought it worthwhile doing anyway.

        I forgot to mention in my comment that Jokowi now has his third trade minister as well. And yet It seems such a short time ago that we were reading about what a clever decision he had made in replacing Rachmat Gobel with Thomas Lembong. Now we have to get used to a much more dubious incumbent in the trade portfolio, Enggartiasto Lukito.

        It is so hard to remember how to spell this new minister’s name correctly that Jokowi would have done us all a favour by not appointing him to any position, let alone the post once held by Pang Lay Kim’s distinguished daughter. She too was shunted off too soon, though by SBY rather than his successor.

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