Indonesia's dwindling middle class seen dimming economic outlook 

Rahmat Hidayat lost his job when the shoe factory he worked for closed down last year in the industrial town of Karawang in Indonesia's West Java. 

The 44-year-old now earns less than half of what he used to make by selling grilled meatballs. Unable to afford his wife's diabetes medication, Rahmat picks herbs to make a tonic instead. 

Like Rahmat, millions of working to middle class Indonesians have become poorer, largely due to an increase in layoffs and a drop in the number of job opportunities since the pandemic. 

This trend bodes ill for the outlook for Southeast Asia's biggest economy - household consumption accounts for over half of gross domestic product - as well as the widely held investment thesis that an expanding middle class will drive Indonesia's ambition to become a high-income nation by 2045. 

It also poses a challenge for the incoming administration of President Prabowo Subianto, who won a February election by a landslide on promises to boost economic growth and create 19 million of jobs. Prabowo takes office on Oct. 20. 

"Pushing the economy to grow higher with weak consumption is difficult," said Mohammad Faisal, an economist at the Jakarta-based Center of Reform on Economics. 

The government classifies those who spend between $132 to $643 a month as middle class, based on a World Bank criteria. This group is key to economic growth as their spending accounts for nearly 40% of private consumption, and more than 80% if combined with the aspiring middle class, who spend $57 to $132. 

The size of the middle class, however, has dropped from 21.5% of the total population in 2019 to 17.1% in 2024, according to official data released last month. 

Even though Indonesia's economy has bounced back after the pandemic, with growth of around above 5% a year since 2022 amid generally low inflation, this shrinking middle class is likely to pressure future growth, as the government will have to contend with lower tax revenues and a possibly more subsidies, said Jahen Rezki, an analyst from the University of Indonesia. 

"In the long run, if the middle class dwindles, it will certainly be a big burden for the state," he said. 

BIG STATE SPENDING 

One of the main reasons for the demise of the middle class is the changing labour market. 

A large portion of the foreign investment coming into Indonesia has targeted industries such as mining, which are becoming much less labour intensive as more cutting edge technology is deployed. 

Also, stronger competition from lower cost destinations such as China, especially in the textile sector, has squeezed factories, leading to lay offs that the textile association said were the worst in the last decade. 

Prabowo's brother and adviser Hashim Djojohadikusumo said the incoming government will help the middle class by creating millions of new jobs from projects like the $28 billion free meals programme and the building of millions of homes. 

"We want to create a lot of small, medium and micro entrepreneurs, for example through our housing programme. We want to build 3 million units of houses, in villages and cities. That's to create middle class," he told Reuters recently. 

However, how much the next government is able to spend on welfare schemes might be limited, especially next year when a large amount of government debt is due to mature, said Teguh Yudo Wicaksono, an economist at Islam Internasional Indonesia University. 

For former factory worker Rahmat, the best help the government can give is a handout he can use to expand his food business, as it has become increasingly difficult to find a job. 

His wife Fatimah said her children often ask for their favourite spicy meat dish, but she can only afford to feed them instant noodles with eggs most of the time. 

"I could only tell my kids to please wait until dad got his fair compensation from the factory, we will cook a delicious meal again," she said. 

Source: Reuters 

New bill sets stage for Prabowo’s planned state revenue agency  

The promised state revenue agency would be responsible for boosting tax revenue to fund Prabowo's campaign promises. 

The House of Representatives has taken steps to clear the way for president-elect Prabowo Subianto to establish his promised state revenue agency, which would be responsible for boosting tax revenue to fund his campaign promises.  

These steps include the introduction of a new stipulation that would allow the government to set up a ministry or government agency based on its “sub-affairs”.  

The rule is part of a bill revising the 2008 Ministry Law to remove legal limits on the number of cabinet ministries, which are currently capped at 34. Lawmakers are expected to pass the bill into law by the end of this month.  

House Legislation Body (Baleg) member Achmad Baidowi told reporters on Monday that the move offered “flexibility” for future administrations so they could freely add or merge ministries with minimal restrictions.  

The bill would also serve as legal foundation for the planned state revenue agency, he said. 

 In his presidential campaign, Prabowo stated his intention to spin off two state revenue arms under the Finance Ministry – the tax office and the customs and excise office – into a standalone revenue agency. He said the changes would allow the government to bring in more revenue.  

The idea is not new, and has been considered by previous presidential administrations. 

Prabowo said the arrangement would help achieve his target tax revenue ratio of 13 to 14 percent of gross domestic product (GDP) by 2029. Last year’s ratio was about 10 percent. 

Indonesia’s tax ratio is among the lowest in the OECD, according to 2022 data, below the group’s average of 34 percent and the Asia-Pacific average of 19.3 percent.  

The planned state revenue agency, however, has yet to appear in official documents for the 2025 state budget, which will be the first annual budget under Prabowo’s presidency. 

Kamrussamad, a lawmaker from Prabowo’s own Gerindra Party, said on Monday that the president-elect was waiting for lawmakers to pass the bill to into law. For now, he added, state revenue affairs would be conducted under the existing system.  

He said the incoming government was moving “on a priority scale based on the people’s interests”.  

All nine political party factions in Baleg agreed on Monday to allow the number of cabinet ministries to be “determined by a sitting president in accordance with the needs of their administration”.  

Trade Minister Zulkifli Hasan, who chairs the National Mandate Party (PAN) and backed Prabowo in February’s presidential election, said on Wednesday that the president elect was planning have some 44 ministers in his cabinet. 

Deputy Finance Minister Thomas “Tommy” Djiwandono claimed on Wednesday that the state budget had sufficient resources to execute whatever the president-elect decided. 

Tommy, who is also Prabowo’s nephew, said the ministry had also met with officials from the Administrative and Bureaucratic Reform Ministry to coordinate the plan for extra ministries.  

Wijayanto Samirin, an economist at Paramadina University, told The Jakarta Post on Wednesday that establishing an autonomous revenue body could help ramp up tax collection in the long run, but he warned that the government could not expect a quick result in the early years of the institution.  

“[Fixing] the revenue system is one thing. Fixing governance is a much harder challenge. That is not enough. The economic structure needs to be mended,” he said.  

He also warned that introducing new ministries would increase the expenses of the state bureaucracy, putting an additional burden on the budget. To accommodate his supporters, Prabowo could simply add deputy minister positions instead of increasing the number of ministries, the economist said.  

The International Monetary Fund (IMF) said in an August report that plans to establish the planned new revenue agency “should be carefully designed, as such restructuring may prove costly”.  

“Achieving net gains in tax collections will require tackling the fundamental tax administration gaps,” the IMF report continued.  

The IMF suggested an ambitious tax policy reform that included reviewing tax expenditures, such as tax holidays and incentives, adding that it was critical to “prevent the erosion of the tax base and secure improved tax revenues over medium term”. 

Indonesia forewent some 1.7 percent of GDP worth of tax revenue through such tax holidays and incentives, the IMF estimated.  

Short-term measures could include improving compliance, utilizing third-party data and broadening the taxpayer base, among others.  

Political analyst Ujang Komarudin told the Post on Monday that the bill would lead to a “fat cabinet”. He suggested Prabowo structure cabinet ministries prudently: “not too many, but not too few”. 

Source: The Jakarta Post 
 

Bali Proposes 2 Year Moratorium on New Hotels, Villas and Clubs 

Acting Governor of Bali Sang Made Mahendra Jaya has proposed a moratorium on the construction of tourism accommodations in Denpasar, Badung, Gianyar, and Tabanan (Sarbagita region). The proposal, submitted to the central government, seeks to reorganize the sector and promote sustainable tourism. 

“The Bali provincial government has proposed a moratorium on the construction of hotels, villas, nightclubs, and beach clubs in Sarbagita for 1-2 years to the Coordinating Ministry for Maritime and Investment Affairs. We need to reorganize,” Mahendra Jaya said recently in Denpasar. 

He emphasized that the proposal aims to foster high-quality tourism in Bali. It also addresses concerns about the conversion of rice fields into commercial areas and the Online Single Submission (OSS) licensing system, which often bypasses local authorities. 

"I was shocked when I saw viral TikTok videos of cliff-cutting and the sudden appearance of large beach clubs in Tabanan and Denpasar. We had no knowledge of these developments," he said. 

Mahendra Jaya also highlighted the rapid land conversion and the widespread sale of alcohol in small shops, which has led to incidents involving intoxicated foreigners. 

The Bali government hopes that a central government meeting, led by the Coordinating Ministry for Maritime and Investment Affairs, will result in a Presidential Instruction (Inpres) to implement the moratorium and regulate land conversion. 

So far, the central government has responded positively to the proposal, particularly given the issues that have gone viral on social media. The moratorium also aims to address the influx of foreign workers taking local jobs due to unregulated permits. 

Tourism and Creative Economy Minister Sandiaga Uno expressed his support for the moratorium, acknowledging that certain areas in Bali have become overly congested. 

“We continue to educate the public on this matter. We hope the community will support this initiative. We are committed to ensuring high-quality and sustainable tourism,” Sandiaga said Monday. 

Source: Jakarta Globe