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. 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.
However, 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 percent — as compared to the Philippines’ 13 percent, Malaysia, and Thailand’s 16 percent— 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 percent 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 percent.
This isn’t the first time that the Indonesian government has set unrealistic targets. In 2015, the tax revenue target was set at 30 percent growth from 2014 levels but it only realised 8 percent 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 percent increase from what was collected in 2015.
As for the 2017 budget, Mulyani has proposed a target of 13 percent growth in tax revenue (to around 1495 trillion rupiah or US$113 billion). However, if tax revenue grows at the more ‘normal’ rate of 8–9.5 percent, 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.
However, 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.