Indonesian President Prabowo Subianto's abrupt change of plan regarding the VAT increase has raised concerns about Indonesia's economic stability and policy consistency.
Indonesia n President Prabowo Subianto's sudden reversal on increasing the value-added tax ( VAT ) from 11 to 12 percent, applying it only to luxury goods, has sparked concerns among trade scholars. This eleventh-hour shift, announced on December 31, 2024, just before the anticipated VAT hike, has created significant uncertainty for businesses and investors, questioning Indonesia 's fiscal management and economic strategy.
The decision undermines confidence in the government's policy consistency, as businesses in the formal economy had spent months preparing for the VAT increase, adjusting pricing strategies and supply chains. This sudden change introduces operational disruptions, adds to compliance burdens, and makes long-term planning more difficult.Such unpredictability erodes Indonesia's reputation as a stable place to invest and conduct business. The VAT hike, initially intended to boost state revenue, address a low tax-to-gross domestic product (GDP) ratio of around 10.5 percent, and fund critical investments in infrastructure and education, is now narrowed in its fiscal impact by limiting the increase to luxury goods. While shielding lower-income households from immediate effects, this approach fails to address broader economic inequities and weakens the government's ability to meet revenue targets. Indonesia's shrinking middle class – which fell from 23 percent of the population in 2018 to 17 percent in 2023 – remains under pressure. This crucial group drives domestic consumption and contributes to state revenue, but erratic policy shifts exacerbate their financial challenges and limit their economic participation. Essential goods, though spared from the VAT hike, remain unaffordable for many due to stagnant wages and rising living costs. Labour-intensive industries, once key drivers of job creation, have been hit hard by rising competition and labour costs. The government's emphasis on downstreaming strategies, which are capital-intensive and create fewer jobs, further strains middle-class households. The future of labour-intensive industries remains uncertain, highlighting the need for a coherent industrial policy aligned with broader economic goals.
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