State Finances at the Beginning of the Year: Tax Payments Fall, Expenditures Swell

The condition of the state's wallet being "tight" is due to the imbalance in the pace between the state's revenue and spending during the period of January-March 2024. The Ministry of Finance recorded that the main revenue positions have contracted significantly due to the decline in commodity prices and the increasing tax refunds by the mining, manufacturing, and trading industries.

"Our tax growth is relatively small and we have to be careful. This is a mix picture of our current economic condition. "Overall, even though our economic momentum remains maintained, there are several sectors that are not immune to global influences," said Minister of Finance Sri Mulyani Indrawati in the March 2024 edition of our APBN press conference, Friday (26/4/2024).

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In general, the state revenue until March 31, 2024 reached Rp 620 trillion, down 4.1 percent annually. This slowdown is due to a decrease in tax revenue by 8.8 percent as well as a decrease in customs and excise by 4.5 percent. Only Non-Tax State Revenue (PNBP) still recorded a positive growth of 10 percent.

In more detail, the majority of main tax collection offices experienced contraction at the beginning of the year. Domestic Value-Added Tax (VAT) as the main contributor to revenue decreased by 23.8 percent on a net basis, plummeting from the previous year's growth that surged to 67.3 percent. VAT represents the rate of household consumption and public purchasing power.

Similarly, the reception of Import VAT decreased by 2.8 percent, down from last year's growth of 11.2 percent. This position was corrected due to a very sharp decline in import growth during the January-March period, namely 12.76 percent annually.

Corporate Income Tax (CIT) is the revenue item that is most closely monitored by the Ministry of Finance due to its contraction rate of up to 29.8 percent, a decrease from the previous year's high growth of 68.1 percent.

The decline in corporate income tax revenue is caused by the significant drop in commodity prices which results in a decrease in annual income tax payment and an increase in tax refund requests.

"This is dominated by mining and manufacturing companies that have experienced corrections in commodity prices and sharp export demand, leading them to request tax restitution. This needs to be observed, as it means there is a correction in economic activity that is starting to affect state revenue," said Sri Mulyani.

Of the four main tax revenue streams, only PPh 21 has continued to grow positively at 25.9 percent, up from last year's growth of 21.7 percent. Sri Mulyani stated that this positive performance shows that the receipt of wages or salaries for employees is still maintained. "Companies can also recruit new employees to become taxpayers," she said.

Shopping increases

Sectorally, there are several sectors that are highly vulnerable to global economic fluctuations. For example, tax revenue from the manufacturing industry, which is the largest contributor to net tax revenue, contracted by minus 13.6 percent. The decrease in revenue was due to refund claims from manufacturing companies that experienced a global demand decline.

There is also the mining sector, whose tax revenues have been deeply corrected. Last year, this sector still recorded a high growth tax revenue of 112.8 percent. This year, tax revenue from mining has dropped to minus 58.2 percent.

The decline in corporate income tax revenue is caused by the significant drop in commodity prices which results in a decrease in annual income tax payment and an increase in tax refund requests.

On the other hand, while tax revenues are decreasing, the government's expenditures in the first quarter of 2024 actually increased due to the organization of the 2024 General Election and the allocation of various social assistance programs at the beginning of the year. The Ministry of Finance noted that government spending from January to March 2024 had reached Rp 611.9 trillion, an increase of 18 percent from last year.

As a comparison, government spending in the same period last year (January-March 2023) amounted to Rp 518.6 trillion or grew 5.7 percent annually. Sri Mulyani said that the increased expenditure was influenced by assistance programs for basic necessities, the distribution of social aid, and support for the implementation of the election carried out at the beginning of the year.

"Indeed, there has been a significant increase in spending, because this year there were frontload activities at the start of the year, such as the election. "Usually, in non-election years there is no large election spending at the start," he said.

Not “as great” as 2023

The imbalanced pace of government revenue and spending at the beginning of the year also affected the APBN surplus position, which was only thinly maintained by March 2024 amounting to Rp 8.1 trillion, or only 0.04 percent of the gross domestic product (GDP). For comparison, in the same period last year, the surplus at the beginning of the year could still reach Rp 128.1 trillion (0.61 percent against GDP).

Director General of Budgeting at the Ministry of Finance, Isa Rachmatarwata, said that the government has predicted that this year's surplus will not be as "good" as last year's achievement due to slower revenue collection and increased spending. However, in the future, spending will be normalized to be more effective and to balance the decrease in state revenue.

"We may not see revenue surpluses as great as last year, but we will continue to manage this, especially from the expenditure side where we hope for normalization," said Isa.

Deputy Minister of Finance Suahasil Nazara added that so far, fiscal deficit throughout the year is still designed at 2.29 percent of GDP. "There is indeed a contraction in revenues, there is an acceleration in spending due to the election, and the surplus is smaller compared to last year. "However, this position will change every month and we will continue to monitor it," he said.

Teuku Riefky, Macroeconomics and Finance Researcher from the Economic and Social Research Institute, Faculty of Economics and Business, University of Indonesia, assessed that the weakening of tax performance at the beginning of this year was understandable due to the slowdown in global and domestic economic activity. Some of these things could increase the risk of pressure on the fiscal deficit to widen above the initial APBN target.

Even though there is pressure, he believes that state finances will remain managed below a safe deficit limit. "So the deficit should still be maintained. The hope is that in the remainder of this year economic conditions will improve. Political uncertainty has decreased because a new government has been elected and current pressures such as geopolitical tensions and monetary policy will be higher for longer. reduced," said Riefky.