Indonesia considering raising fiscal deficit above 3% to fight virus

Indonesia is discussing raising the limit on the country's fiscal deficit as a proportion of GDP above an existing 3% legal limit to aid the fight against coronavirus and to shield the economy, its deputy finance minister said on Tuesday. The Finance Ministry has widened its deficit estimate to around 2.5% of gross domestic product (GDP) this year, up from 1.8% initially planned, but deputy minister Suahasil Nazara said it could go further.

Parliament's budget committee recommended on Monday the government raise the cap to 5% to allow more budget maneuvering and issue a regulation in lieu of a law to allow it to surpass the 3% limit stipulated in a 2003 law. In a conference call on Tuesday, Nazara said the government was now in talks with parliament on the issue and "I can tell you that a higher than 3% deficit is an option on the table."

Indonesia is raising health spending to 1.5% of GDP from 0.8% by reallocating another spending, but he said the government is gearing up for even more spending as the outbreak continues. Nazara said cash transfers to around 15 million poor families will be increased to support their purchasing power as the economy suffers disruptions due to the outbreak.

Indonesia has already launched two stimulus packages that include tax breaks to certain industries and easing import rules. Meanwhile, President Joko Widodo said in a speech on Tuesday he had asked provincial governors to slash non-priority spending and noted: "the current fiscal condition is not easy."

"We need to refocus and reallocate the budget to tackle issues that are caused by COVID-19," he said. Finance Minister Sri Mulyani Indrawati has identified 62.3 trillion rupiahs ($3.78 billion) of spending in the 2020 budget that could be redirected to the COVID-19 response.

Meanwhile, the budget is facing pressures on the revenue side as the government saw revenues from corporate taxes drop by nearly 20% in January and February from year-ago levels. Widodo said the government had prepared various scenarios for the impact on the government's finances and under its "medium impact scenario" if the outbreak lasted until September, laborers' income could fall by as much as 25% and farmers' income by 34% in some provinces.

Bank Indonesia has revised down its economic growth outlook for this year to 4.2%-4.6% from 5.0%-5.4% previously. ($1 = 16,465 rupiah)