Strengthening the effectiveness of public finances in Indonesia

The main objectives of the Indonesian Government’s medium-term development strategy for the period 2015–2019 are to improve the quality of life of the population and reduce inequalities. The implementation of this strategy relies on the Government’s budget capacity to improve its revenues and expenditures in priority sectors (infrastructure, social assistance and health). Thus, the Government of Indonesia has embarked on a fiscal and budgetary reform program which aims is to ensure a sufficient level of revenue to allow investments and redistribution in favour of the local population.

AFD supports the Indonesian fiscal and budgetary reform through a three-tranche development policy loan. The objective of this reform is to increase Indonesia’s tax potential by broadening the tax base, easing administrative complexity, reducing economic distortions and simplifying tax structures.

The program aims at:

• Pillar A – Improving the composition of spending, budget execution and efficiency of spending
• Pillar B – Increasing tax administration efficiency, compliance management and audit capability, and reducing the cost of paying taxes
• Pillar C – Increasing revenue potential and economic efficiency of tax policy.

In addition, AFD mobilises specific grants for Technical Assistance program aiming at strengthening the capacity of the Indonesian Ministry of Finance and promoting peer to peer exchanges with the French tax administrations. The program, implemented by Expertise France, deals with key issues: taxation of the digital economy, climate fiscal policy, development of VAT and indirect taxation and international taxation policies.

• Sustainable Growth and Resilient Economy: the tax-to-GDP ratio is expected to increase up to 3% of GDP by 2022
• Reduction of social inequalities: increase in the share of central government budget allocated to infrastructure, social assistance and health sectors
•  Climate resilience: improve the monitoring, planning and budgeting of climate finance through the establishment of a climate budget tagging mechanism.