Indonesia's Fiscal Data: Reassessing the 2026 Fiscal Policy Outlook

Fitch Ratings' decision in March 2026 to revise the outlook on Indonesia's sovereign debt from stable to negative, while maintaining its BBB rating, immediately brought Indonesia's fiscal capacity back into focus. Fitch was particularly concerned about the government's limited ability to increase state revenues. The agency estimated that the government revenue-to-GDP ratio would remain at only around 13.3% in 2026 and 2027, well below the 25.5% median for BBB-rated countries. Fitch also projected Indonesia's fiscal deficit in 2026 at approximately 2.9% of GDP.

These concerns cannot be dismissed. Indonesia does indeed face a structural problem of a low revenue ratio. However, treating Fitch's March 2026 projection as a definitive assessment of Indonesia's fiscal conditions throughout 2026 would be premature. The realization data from the 2026 State Budget (APBN) available through July instead point toward a more positive trajectory. State revenues had reached Rp1,252.4 trillion, equivalent to 66.19% of the APBN target, representing 32.84% year-on-year growth. Tax revenues reached Rp885.62 trillion, or 55.27% of the target, and grew by 23.91% year-on-year.

Accordingly, Indonesia's fiscal situation in 2026 should not be understood solely as a problem of insufficient revenue. Actual data indicate a strengthening of revenue-raising capacity, while the government continues to maintain fiscal discipline with respect to the deficit and directs expenditure toward supporting economic activity.

The most important point in reassessing Fitch's outlook is to distinguish between forecast and realized performance.

In March 2026, Fitch based its assessment on the expectation that the government would face constraints in mobilizing revenue. By the end of July, however, state revenues had grown by 32.84% year-on-year. Earlier, by the end of the first half of 2026, state revenues had already reached Rp1,459.4 trillion, equivalent to 46.3% of the APBN target, representing 21.4% year-on-year growth. Tax revenues reached Rp1,035.7 trillion and grew by 24.6%, while Non-Tax State Revenue (Penerimaan Negara Bukan Pajak, PNBP) reached Rp271 trillion and grew by 21.6%.

These figures matter because they directly address Fitch's principal concern.

If the central problem is the government's ability to mobilize revenue, then the empirical question is whether revenue actually weakened throughout 2026.

State revenues instead show signs of acceleration. Tax revenues had already grown by 22.1% through May, up from 16.1% growth in April. At the same time, corporate and personal income tax revenues increased, while Value Added Tax (VAT) and Luxury Goods Sales Tax (PPnBM) grew in line with domestic consumption activity. There is therefore empirical grounds to question whether the negative outlook issued in March still fully represents Indonesia's fiscal conditions several months later.

The 2026 revenue data become even more significant because this growth did not primarily result from higher tax rates. According to the Ministry of Finance, by July 2026, tax revenue growth approaching 30% was achieved through strengthened governance at the Directorate General of Taxes and the Directorate General of Customs and Excise, as well as the implementation of Coretax, without increasing tax rates or introducing new types of taxes.

The first approach primarily increases the tax burden through higher rates. The second strengthens the state's ability to identify the tax base, improve compliance, integrate data, reduce leakage, and expand the effectiveness of tax administration. If revenue growth can be achieved without increasing tax rates, the government is beginning to demonstrate the potential to build fiscal capacity through compliance and administration, rather than relying solely on an increased tax burden. From this perspective, Coretax is not merely an administrative digitalization project. It is part of broader state capacity building.

Fitch itself has acknowledged that improved compliance and an expanded tax base can serve as instruments for increasing the government revenue ratio. The difference is that Fitch expected their impact to remain limited in the short term. The 2026 data are beginning to suggest that the effects of improved administration and compliance may materialize more rapidly than previously anticipated.

The Tax Ratio Problem Can Instead Be Viewed as Fiscal Upside

If the median revenue-to-GDP ratio among BBB-rated countries is approximately 25.5%, while Indonesia remains significantly below that level, Indonesia clearly has a substantial revenue gap. Yet this revenue gap can be interpreted in two ways.

The first interpretation is that Indonesia has weak fiscal capacity.

The second is that Indonesia possesses substantial untapped fiscal space that has not yet been fully mobilized. The second interpretation becomes relevant if the government can broaden the tax base without placing excessive pressure on economic growth. Indonesia does not need to reach the BBB-country median in a short period. Even a gradual increase in the revenue ratio would generate significant additional fiscal space because of the sheer size of Indonesia's economy. Therefore, a low tax ratio should not be viewed solely as an indicator of weakness. It can also indicate untapped fiscal capacity.

The APBN Remains Expansionary, but Fiscal Discipline Has Not Disappeared

By the end of the first half of 2026, government expenditure had reached Rp1,656 trillion, representing 17.8% year-on-year growth. The government has maintained the APBN as both a countercyclical instrument and an agent of development, including to support priority programs, social protection, development, and domestic economic activity.

The fiscal deficit through the end of June stood at only Rp196.5 trillion, or approximately 0.76% of GDP. Moreover, the primary balance remained in surplus at Rp85.1 trillion. The primary balance reflects the fiscal position before interest payments on government debt. A primary surplus means that government revenues remain sufficient to cover government expenditure excluding interest payments.

Government spending can increase aggregate demand in the short term. However, when directed toward infrastructure, food security, education, healthcare, connectivity, industrial productivity, and human capital, its effects can extend beyond its countercyclical function. In other words, there is an important distinction between consumptive fiscal expansion and productive fiscal expansion.

PNBP Demonstrates That Fiscal Capacity Is Not Identical to Taxation

Fitch places considerable emphasis on state revenues. However, Indonesia's revenue structure does not consist solely of taxation. Non-Tax State Revenue (PNBP) has also demonstrated positive performance. By the end of the first half of 2026, PNBP had reached Rp271 trillion, representing 21.6% year-on-year growth. By May 2026 alone, PNBP had reached Rp226.4 trillion and grown by 19.9%. The Ministry of Finance attributed this performance, among other factors, to improvements in the quality of services provided by ministries/agencies and Public Service Agencies (BLUs), strengthened compliance, law enforcement, and increasingly effective revenue management.

This demonstrates that strengthening Indonesia's fiscal position can operate through multiple channels. PNBP, optimization of state assets, management of state-owned enterprises (SOEs), stronger economic activity, and increased national productivity represent additional channels.

Accordingly, the government's fiscal agenda should be understood as one of diversifying and strengthening fiscal resources, rather than merely increasing tax rates.