Amid lingering global economic uncertainty, Indonesia faces a dual challenge as it approaches 2026: achieving fiscal independence while sustaining its ambitious 8 percent economic growth target. These two objectives are inherently interconnected, yet increasingly difficult to reconcile. The government is expected to finance development sustainably without overburdening society, while simultaneously maintaining growth momentum in an increasingly fragile global environment.
Fiscal independence is not merely about reducing reliance on debt. More fundamentally, it reflects a state’s capacity to mobilize domestic revenue, particularly taxation, effectively and sustainably. It is precisely in this area that Indonesia continues to face structural constraints.
Over the past five years, Indonesia’s tax ratio has remained persistently low. After standing at 9.76 percent in 2019, it declined sharply to 8.33 percent in 2020 amid the pandemic. Although it recovered to 9.12 percent in 2021 and peaked at 10.39 percent in 2022, the trend weakened again in 2023–2025, hovering around 8.58 percent, well below the government’s own targets.
Data from the Ministry of Finance up to October 2025 show that tax revenues reached only around 70 percent of the annual target. The shortfall was driven mainly by declining corporate and personal income tax receipts, as well as weaker VAT and luxury tax collections. Rising tax refunds and soft domestic consumption further compounded the problem.
By international standards, Indonesia’s position is increasingly concerning. The International Monetary Fund recommends a minimum tax ratio of 15 percent of GDP to ensure fiscal sustainability. Regional peers such as Thailand and Vietnam have exceeded 16 percent, while OECD countries average above 20 percent. Indonesia’s persistently low ratio signals a structural weakness in its fiscal capacity to finance development without excessive borrowing.
More importantly, the problem is not merely tax rates, but the wide gap between potential and actual revenue. This gap reflects weaknesses in tax administration, low compliance, and, most critically, the vast size of the shadow economy.
The Shadow Economy: A Structural Fiscal Threat
One of the main forces undermining Indonesia’s fiscal performance is the expanding shadow economy, economic activities that operate outside official registration and taxation, whether legal or illegal.
According to World Economics’ Quarterly Informal Economy Survey, developing countries typically record shadow economies amounting to 30-40 percent of GDP. In Indonesia, estimates range from 22 to 40 percent, depending on methodology.
Statistics Indonesia (BPS) reported that as of February 2025, around 59.4 percent of Indonesia’s workforce remained in the informal sector. This means that more than half of economic activity occurs outside the formal tax system. While the informal sector plays a short-term role in absorbing labor and maintaining social resilience, its long-term implications are troubling. It erodes the tax base, distorts fair competition, and weakens public trust in the fiscal system. Businesses that comply with tax obligations are forced to compete with informal actors who bear no regulatory or fiscal burden, undermining incentives for compliance.
The fiscal cost is substantial. Trillions of rupiah in potential revenue are lost annually, limiting the state’s ability to invest in infrastructure, education, and social protection.
Fiscal Dilemma and the Relevance of Keynesian Insight
Conventional policy responses often rely on intensifying tax collection or expanding the tax base. However, such approaches can become counterproductive during periods of economic slowdown.
This is where John Maynard Keynes’ insights regain relevance. Keynes argued that during economic downturns, governments should avoid overburdening the private sector. Instead, fiscal expansion, through public spending and stimulus, is needed to revive demand, restore confidence, and stimulate growth.
History supports this logic, from the Great Depression to the 2008 global financial crisis and the COVID-19 pandemic. Expansionary fiscal policy helped stabilize economies, revive consumption, and ultimately rebuild tax bases.
For Indonesia, this means fiscal policy should not focus narrowly on short-term revenue targets. Instead, the priority should be expanding the formal economy through digitalization, incentivizing MSMEs to formalize, strengthening enforcement fairly, and improving institutional trust. A broader tax base, not higher tax pressure, is the sustainable path forward.
As Indonesia moves toward 2026, its fiscal challenge is no longer technical but structural. Fiscal independence cannot be achieved merely by raising tax rates or tightening audits. It requires building an economic ecosystem that is inclusive, transparent, and productive.
The government must shift its paradigm from “revenue chasing” to “formalization and growth creation.” Without serious reforms to address the shadow economy, ambitions for 8 percent growth and fiscal self-reliance risk remaining rhetorical. Ultimately, fiscal success should not be measured by how much tax is collected, but by how fair, effective, and sustainable the economic system becomes. In this regard, political will and policy consistency will determine whether Indonesia’s fiscal future is resilient or perpetually constrained.
