The Finance Minister’s bold idea to revive household spending sparks hope—and fiscal caution—among economists and businesses.

Indonesia’s Finance Minister Purbaya Yudhi Sadewa has hinted at a potential cut in the value-added tax (VAT) rate from 11% to as low as 8% starting in 2026. The move, aimed at boosting consumer purchasing power, could reshape the nation’s economic landscape—but not without fiscal risks.

A Bold Plan Amid Weak Revenue

During a September 2025 press briefing on the national budget, Minister Purbaya revealed that his ministry is exploring ways to lower VAT to stimulate household consumption. However, he cautioned that the decision will depend on the government’s fiscal health and state revenue by year-end.

By September 2025, tax collections had fallen 4.4% year-on-year to Rp 1,295.3 trillion, driven by sharp declines in corporate income tax (down 9.4%) and VAT (down 13.2%). “I must be careful,” said Purbaya. “If we lower the VAT too soon, our deficit could exceed 3%. We need balance.”

Public and Business Support for a Cut

Despite fiscal caution, business leaders are largely supportive. Shinta W. Kamdani, Chairperson of the Indonesian Employers Association (APINDO), argued that a VAT reduction could reignite domestic demand. “Household consumption still contributes over 54% to Indonesia’s GDP, yet consumer optimism continues to decline,” she noted.

According to the Consumer Confidence Index (CCI), optimism fell from 121.1 in July 2025 to 115 in September 2025. Retail sales also slowed, while sales of vehicles and household goods remained in contraction territory. “In this context, cutting VAT is relevant—it would ease the public’s burden and stimulate consumption,” Shinta emphasized.

Parliament Pushes for Action

Lawmakers have echoed the business sector’s call. Mukhamad Misbakhun, Chairman of the House’s Commission XI, urged the government to consider lowering VAT to between 8–10%. “People’s purchasing power remains under pressure. A VAT cut could be the catalyst to lift it,” he said.

Misbakhun had previously opposed the government’s 2025 plan to raise VAT from 11% to 12%, which was ultimately limited to luxury goods following strong public resistance.

Fiscal Room Still Tight

Economists, however, remain cautious. M. Rizal Taufikurahman, Head of Macroeconomics and Finance at INDEF, warned that “the state budget still lacks room for large-scale consumption stimulus.” He noted that national revenue fell 7.2% year-on-year as of September 2025, mainly due to weaker tax receipts and lower commodity-related income.

Rizal explained that while lowering VAT could reduce inflationary pressure and help lower- and middle-income households, it might also erode tax revenue in the short term. “If not balanced with better tax compliance and spending efficiency, the deficit could widen and limit fiscal flexibility next year,” he said.

Learning from Vietnam’s Experience

According to Yusuf Rendy Manilet of CORE Indonesia, the proposal mirrors Vietnam’s 2022 decision to cut VAT from 10% to 8% to revive post-pandemic demand. The policy successfully boosted short-term consumption but also reduced government income temporarily. “Indonesia can adopt a similar approach,” said Yusuf, “provided it pairs the tax cut with efficient spending—especially in food subsidies, social aid, and MSME support.”

Balancing Growth and Sustainability

While the proposed cut could help households weather economic uncertainty, experts agree it must be paired with long-term fiscal discipline. The State Budget (APBN) already posted a Rp 371.5 trillion deficit by September 2025, as spending reached Rp 2,234.8 trillion against Rp 1,863.3 trillion in revenue.

Without prudent management, analysts warn, a sharp tax cut could transform Indonesia’s budget structure into one that is pro-consumption but fiscally fragile.

Purbaya’s potential move to slash VAT to 8% marks a high-stakes test for Indonesia’s fiscal policy. If executed carefully—with expanded tax bases and efficient spending—it could revive household consumption and sustain growth. But without strong structural reforms, the short-term relief might come at the cost of long-term fiscal stability, shaping Indonesia’s economic trajectory for years to come.

Sources: CNBC Indonesia (2025) , CNN Indonesia (2025)

Keywords: VAT Reduction, Indonesia Economy, Purbaya Yudhi Sadewa, Fiscal Deficit, Consumer Confidence, APBN 2025