UNAIR NEWS – The Indonesian government is set to raise Value Added Tax (VAT) to 12%, effective January 1, 2025. This policy has sparked mixed reactions among experts and the public, particularly in light of the declining middle class and weakened purchasing power in Indonesia.
Professor Rossanto Dwi Handoyo SE, MSi, PhD, an economist from Universitas Airlangga’s Faculty of Economics and Business (FEB), shared his analysis of the policy. He pointed out that Indonesia’s economic growth remains robust, despite global challenges.
Prof. Handoyo also noted that the nation’s trade balance continues to show a surplus, indicating higher export volumes compared to imports. “In comparison with other countries, our economic growth is quite impressive. For instance, China’s growth is now below 5%,” he stated.
Declining middle class and purchasing power
From 2019 to 2024, Indonesia experienced a significant reduction in its middle class. Prof. Handoyo attributed this decline to the lingering effects of the COVID-19 pandemic. “Our middle class has not fully recovered since COVID-19. The pandemic triggered a steep decline in this demographic,” he explained.
Regarding the weakening purchasing power, Prof. Handoyo commended the government’s efforts to maintain stability. He highlighted Indonesia’s relatively steady fuel prices, even amid global conflicts. “The government has been strategic in safeguarding purchasing power through administrative price controls,” he noted.
Addressing the deflation observed over five consecutive months, Prof. Handoyo suggested two possible factors: an oversupply of goods or reduced consumer demand. “Further analysis is needed to determine whether the issue stems more from excessive supply or a demand shortfall,” he remarked.
Economic impact of VAT hike
VAT is essentially a tax imposed on producers who convert raw materials into finished products. Prof. Handoyo noted that the increase in VAT is likely to reduce household consumption while boosting the state budget (APBN). “Prices will rise, but the increase should still be manageable,” he explained.
He expressed optimism that the higher APBN revenue could serve as a catalyst for economic growth through increased government spending. “For instance, building roads, airports, and ports can stimulate economic growth. However, the decline in household consumption due to the tax hike must also be addressed,” he emphasized.
Prof. Handoyo underscored the importance of effective government spending in maximizing the policy’s benefits. “It’s imperative that APBN expenditures are managed effectively to benefit society. Investments in infrastructure must not go to waste—ensure these projects provide tangible benefits to the communities they serve,” he concluded.
Author: Afifah Alfina
Editor: Edwin Fatahuddin
