Prabowo Subianto has won over millions of Indonesian voters with promises of free school meals. But his big spending plans have yet to convince investors that he can afford to provide free meals to the entire country.
Indonesia's new president is considering tougher tax enforcement, reduced subsidies, potentially increased borrowing and even budget cuts for a new $32 billion to fund his flagship campaign promise, a national school meals program estimated to cost 460 trillion rupiah ($28 billion).
Prabowo is also considering a larger cabinet, according to three people briefed on internal discussions, highlighting expansionary spending on multiple fronts that could weigh on Indonesia's fiscal prudence.
It would also mark a break with his predecessor Joko Widodo, known as Jokowi, who transformed Southeast Asia's largest economy in a decade, harnessing Indonesia's vast nickel reserves to position it at the centre of the global electric vehicle supply chain.
The Prabowo administration is expected to adopt a more liberal approach to fiscal spending, given the increased spending needs implied by its new programs, said Brian Lee, an analyst at Maybank. This contrasts with the more conservative approach of the Jokowi administration.
Prabowo, who campaigned on continuity with the Widodo era, is discussing expanding the cabinet from 34 portfolios to between 40 and 43 when he takes office in October, one of the sources said.
The number of coordinating ministries that oversee other ministries will increase from the current four, and some of the existing ministries will be separated from each other, the person said.
Prabowo could create a separate body, either a full ministry or an agency, to oversee the meal program. He is also considering creating a separate tax agency to boost tax collection.
Some of the new positions are being created to meet the demands of coalition partners, one of the people said. While Prabowo won a decisive victory in Indonesia’s presidential election in February, his parliamentary alliance fell short of a majority and is currently in talks with potential coalition partners.
But a larger government will increase operating spending, and the administration has few easy ways to increase its fiscal room, analysts said.
The government does not appear to have much room to increase current spending without increasing the budget deficit, said Thomas Rookmaaker, head of Asia Pacific sovereigns at Fitch Ratings.
According to sources familiar with the discussions, Prabowo's team is counting on a combination of higher tax revenues, potential subsidy cuts and sales of state assets. The government subsidizes fuel, electricity and cooking oil. None of the proposed options are easy to implement, one of the sources said.
Increasing tax revenues would be a particular challenge. Prabowo wants to increase the tax revenue-to-GDP ratio from 10 to 16 percent.
Increasing tax revenues will be difficult. Tax collection shortfalls are due to compliance and enforcement issues, which stem in part from poor data availability, Maybanks Lee said.
Another option would be to cut the budget for Nusantara, a new capital city to be built in the tropical jungles of Borneo, according to the three sources familiar with the discussions. Widodo had pitched his pet project as a transformative plan to ease congestion in Jakarta and revive economic growth outside Java, Indonesia's most populous island.
But the project, which could cost up to $32 billion, has become increasingly unpopular. Foreign investors have failed to materialize and problems acquiring land have mounted. Nusantaras' leaders resigned in June, just weeks before Independence Day, which was to have been the first in the new capital.
Prabowo has rarely mentioned Nusantara in public since the election, Maybanks Lee noted. When you have so many ambitious spending plans, you have to prioritize.
Indonesia could also take on more debt, something Prabowo has already called on the country to do more boldly. Jakarta's debt-to-GDP ratio of about 39 percent is lower than that of other countries in the region.
Increased borrowing could trigger higher and more sustainable economic growth if directed to the right sectors, said UOB economist Enrico Tanuwidjaja.
But the three people said the administration was also careful not to hurt investor confidence or stir public discontent. The Indonesian rupiah has weakened nearly 6.5% against the U.S. dollar this year, the fourth-worst performance by a major Asian currency, and analysts have warned that increased borrowing could weaken Indonesia’s credit rating.
One of the people familiar with the government's plans said borrowing would be the last option. We must be able to convince the public that we can increase the tax rate. Only then can we justify increasing the debt, he said.
At a press conference late last month, Prabowo's nephew and adviser, Thomas Djiwandono, denied reports that he planned to raise the debt-to-GDP ratio to 50 percent, which economists say would violate rules limiting the budget deficit to 3 percent.
Djiwandono added that the lunch program would be implemented in stages and would cost $4.3 billion during the first year of Prabowo's five-year term.
Djiwandono did not respond to a request for comment.
