Jakarta, 14 July 2025 — The Prasasti Center for Policy Studies (Prasasti) believes the government must accelerate the execution of state spending to help drive the national economic recovery, which remains moderate. In an unstable global environment, government spending stands as one of the key instruments to maintain growth momentum.

“After recording GDP growth of 4.87% (yoy) in the first quarter of this year, we see little improvement in the second quarter. Household consumption—the main growth driver—remains subdued, while the private sector tends to wait for clearer policy signals from the government,” said Gundy Cahyadi, Research Director at Prasasti. According to Prasasti, this fragile momentum signals the urgent need for a more aggressive fiscal policy in the near term.

Data shows that the execution of state spending has been relatively slow. As of the end of June 2025, budget realization had only reached 38.9% of the total state budget allocation, falling behind last year’s realization of 42.0% and below the historical average of 41.2% during 2021–2024. “The slow budget absorption this year is largely due to lower state revenues, particularly in the early part of the year, affected by the global economic slowdown and the implementation of a new taxation system,” Gundy explained. As of June, state revenues had reached just 40.3% of target, well below the five-year average of over 52.4%.

Nonetheless, this situation strengthens the case for front-loading state spending—accelerating budget realization in the second half of the year. This policy serves as a counter-cyclical tool to boost domestic demand and re-engage the private sector. With consumption and private investment in a wait-and-see mode, clear fiscal signals from the government are essential to spur economic activity.

Such a move, however, will have implications for the fiscal deficit trajectory. If spending is accelerated while revenues have yet to fully recover, the 2025 state budget deficit could widen beyond the target of 2.78% of GDP—potentially approaching or even exceeding the 3% threshold that has long served as a fiscal prudence benchmark. “However, in the current context, a wider deficit should not be viewed negatively—provided spending is directed toward productive programs such as industrial downstreaming, food security, MSME transformation, and well-targeted social protection,” Gundy noted.

It is also important to recognize that Indonesia’s macroeconomic fundamentals remain solid. The debt-to-GDP ratio stands below 40%, far lower than many emerging economies. “Market sentiment towards Indonesia has stayed positive throughout this year, as reflected in foreign inflows of IDR 42 trillion into government bonds between January and June 2025,” he said. The three major credit rating agencies also continue to maintain Indonesia’s investment-grade rating, indicating that markets view the country’s fiscal foundation as strong enough to withstand short-term dynamics.

The government should also continue efforts to strengthen state revenues through tax intensification, improved compliance, and evaluation of existing fiscal incentives. “Transparent public communication on fiscal management strategies—including debt policy and spending priorities—will be increasingly important to maintain public and market confidence,” Gundy added.

Prasasti believes that in today’s challenging economic environment, fiscal prudence remains important. However, the courage to act—by accelerating well-targeted spending—will be critical in shaping the path of recovery. Front-loading spending is not merely a short-term response, but a strategic step to strengthen the economic and fiscal revenue base for the future.