Indonesia’s 3% deficit cap: guardrail or growth barrier?

Indonesia is considering lifting a statutory cap on government spending that has been in place for more than two decades, as President Prabowo Subianto pushes for faster economic growth.

Supporters argue that greater room to borrow and spend would let Southeast Asia’s largest economy invest its way towards Prabowo’s target of 8 per cent annual growth by 2029. Economists counter that weakening the rule could push up borrowing costs and dent investor confidence.

At issue is the mandatory ceiling that has long limited the budget deficit to 3 per cent of gross domestic product. The measure, introduced in the aftermath of the 1997-98 Asian financial crisis, aimed to restore fiscal discipline and investor trust.

Indonesia’s economy grew 5.11 per cent last year. Policymakers pushing to revisit the limit say greater fiscal flexibility is needed to fund infrastructure and priority projects and to help the country escape the middle-income trap.