A BOLD MOVE taken by the Minister of Finance to widen the budget deficit, approaching the 3 percent threshold, raises concerns about Indonesia’s future economic resilience. Arguably, the Minister himself views this policy as a tactical step to prevent a crisis like the one that occurred during the 1997–1998 economic crisis. This decision is not without a strong basis, as widening the deficit could potentially lead to a slow reversal of the economic wheel amidst global slowdown pressures.

Proportionally, the budget deficit has widened to 2.92 percent of Gross Domestic Product (GDP), even exceeding the regulatory limit of 3 percent. From this position, excessive spending on major programs such as the Free Nutritious Meals (MBG) program naturally becomes a starting point for endless debate.

This is because wasteful spending in this sector is not matched by an increase in tax revenue within the budget. The logical consequence of widening the deficit with debt financing is that anxiety over improving economic quality remains high. Even though, based on paper calculations, the government’s debt-to-GDP ratio is still relatively safe at 41 percent of GDP and still quite far from the regulatory threshold of 60 percent.

However, once again, this large debt has a high potential to slowly reduce economic growth. This is evident from the decline in investment value growth, tax revenue, and the risks faced by driven businesses.

Allowing a large accumulation of debt clearly poses a risk to Indonesia’s long-term economic journey in the coming decades. So, if this risk becomes a specter for the future, what should the government create to drive organic economic growth?

Measured Policy
Does the current central government’s budget policy have significant potential to generate higher economic growth?

This question certainly deserves re-examination, as widening the deficit clearly brings unusual risks. Among them are concerns about a large and rising debt-to-GDP ratio, a swelling debt burden that makes fiscal space increasingly narrow.

In fact, this large deficit is often financed by foreign debt, increasing the need for foreign exchange. On this side, the rupiah often comes under severe pressure, especially if investors, both domestic and foreign, begin to doubt the country’s fiscal health; this anxiety will only intensify.

One thing that cannot be overlooked here is the threat of significant inflation risk. Especially if the deficit is financed through excessive money printing and increased subsidies, then prices will experience a large increase, ultimately forcing the government to absorb large funds in the financial market, making funds for the private sector increasingly scarce and productive investment declining.

Based on empirical data, inflation in 1997 was 6.23% (year-on-year, annual) based on the Consumer Price Index (CPI).

This data illustrates that throughout 1997, the prices of goods and services continued to rise due to price pressures and the economic crisis that began to emerge in the middle of the year.

In 1998, the peak of the monetary crisis occurred, and it must be underlined that this condition happened not only in Indonesia but across the entire Asian region. This means that even if domestic conditions are supportive, if external conditions are not conducive, the worst situation could still strike Indonesia.

We must not forget how Indonesia’s inflation from 1997-1998 became the most critical period in the country’s economic history. The occurrence of Indonesia’s economic crisis was a result of the Asian monetary crisis, which originated from a currency crisis in Thailand in July 1997 and spread across Asia.

Indonesia became very vulnerable due to several negative domestic conditions, including the problem of very large private foreign debt, an extremely fragile banking system, and a rupiah exchange rate maintained under a managed float system, which made the economic situation seem out of control.

In August 1997, the Indonesian government at the time even released the rupiah into the free market; this policy caused an extreme depreciation.

In the 1998 annual report, the problem of a very sharp depreciation of the rupiah exchange rate was cited as the main factor behind the soaring inflation in 1998. According to that report, inflation in 1997 was around 11.1%, with the rupiah exchange rate at approximately Rp 4,650/USD.

Meanwhile, in 1998, Indonesia’s inflation pressure was around 77.6%, with the rupiah exchange rate at approximately Rp 16,800/USD as of January 1998

Indonesia

Indonesia is a Southeast Asian archipelago of over 17,000 islands, home to a rich tapestry of cultures shaped by centuries of Hindu-Buddhist kingdoms, Islamic sultanates, and European colonialism, notably by the Dutch. Its history is marked by the powerful Srivijaya and Majapahit empires, followed by over three centuries of colonial rule before gaining independence in 1945. Today, it is the world’s largest Muslim-majority nation and is renowned for its diverse heritage, vibrant arts, and stunning natural landscapes like Bali and Komodo Island.

1997–1998 economic crisis

The 1997–1998 economic crisis, often called the Asian Financial Crisis, was a period of severe financial turmoil that began in Thailand in July 1997 and rapidly spread across East and Southeast Asia. It was triggered by the collapse of the Thai baht after speculative attacks, exposing weaknesses like high foreign debt, fragile banking systems, and overvalued assets, leading to deep recessions, massive bailouts, and social hardship in affected countries. The crisis marked a major shift in global economic policy and led to significant financial reforms and greater regional cooperation in Asia.

Asian monetary crisis

The Asian Financial Crisis was a period of severe economic turmoil that began in mid-1997, starting in Thailand with the collapse of the Thai baht. It rapidly spread across East and Southeast Asia, causing massive currency devaluations, stock market crashes, and the collapse of major corporations, largely due to excessive foreign debt and speculative investment. The crisis prompted major financial reforms and international bailouts, fundamentally reshaping the region’s economic policies and institutions.

Thailand

Thailand, officially the Kingdom of Thailand, is a Southeast Asian nation with a rich history as the only country in the region never colonized by a European power. Its culture is deeply influenced by Theravada Buddhism, visible in its thousands of ornate temples like Bangkok’s Wat Arun and Wat Phra Kaew. The country’s historical narrative is marked by powerful kingdoms such as Sukhothai and Ayutthaya, which preceded the modern Chakri dynasty established in Bangkok in 1782.

rupiah

“Rupiah” is not a place or cultural site; it is the official currency of Indonesia. The name originates from the Sanskrit word for wrought silver, *rupya*, and the modern currency was introduced in 1949 following Indonesia’s independence. It serves as a key symbol of the nation’s economic sovereignty and history.

Consumer Price Index (CPI)

The Consumer Price Index (CPI) is not a physical place or cultural site, but an economic indicator. It is a statistical measure, developed in the early 20th century, that tracks the average change over time in the prices paid by urban consumers for a market basket of goods and services. It is widely used to assess inflation and cost-of-living adjustments.

Gross Domestic Product (GDP)

“Gross Domestic Product (GDP)” is not a physical place or cultural site; it is an economic indicator. Developed in the 1930s by economist Simon Kuznets, it measures the total monetary value of all finished goods and services produced within a country’s borders in a specific time period. It has become the primary metric for gauging a nation’s economic health and size.

Free Nutritious Meals (MBG) program

The Free Nutritious Meals (MBG) program is a social welfare initiative, not a physical place, that provides free, balanced meals to school children in India. It was launched nationally in 1995 as the “Mid-Day Meal Scheme” to improve nutrition, increase school enrollment and attendance, and reduce classroom hunger. The program is one of the largest of its kind in the world, serving millions of students daily.