Indonesia has undergone an extraordinary transformation over the past two decades, benefiting from strong growth that has lifted millions out of poverty and allowed important progress in areas such as health and education.
But low levels of public spending and tax revenue are undermining the quality of social services and exacerbating infrastructure gaps, according to the OECD.
In its 2016 Economic Survey of Indonesia, the OECD finds that Indonesia’s tax base is narrow and that compliance is weak. Of Indonesia’s 260 million citizens, only 27 million were registered taxpayers in 2014, and only 900,000 paid what they owed. Increasing revenues is critical to financing investment and social programmes. The number of taxpayers should also be increased through improved compliance and more efficient tax collection.
Public spending efficiency also needs to be improved. The OECD concludes that while the removal of some fuel subsidies has supported increased spending in priority areas such as health, education and infrastructure, further action is needed.
Expenditure on inefficient energy subsidies remains very high ─ accounting for around 7% of public spending ─ and encourages pollution-intensive activities. These subsidies should be phased out, complemented by investments in renewable and geothermal energy to meet rising energy needs.
The OECD notes that the quality of public governance in Indonesia ranks poorly when compared with other major emerging economies. The government’s policy of targeting 20% of government spending on education and 5% on health must be accompanied by improved controls and performance-based budgeting to improve efficiency.
Corruption is main impediment to doing business in Indonesia
Corruption remains the main impediment to doing business in Indonesia. The OECD recommends providing the Corruption Eradication Commission (KPK) with more resources and authority, and supporting the expansion of its training activities into Indonesia’s regions to help sub‑national governments better identify and address corruption.
Decentralization has progressed rapidly in Indonesia and sub-national governments now account for around half of all public spending. Nevertheless, significant inequalities between regions persist.
The OECD suggests improving the technical capacity of sub-national governments to improve spending and budget administration and increase revenue raising sources. In the short-term, the OECD recommends that grants should be directed to national priority areas.
Continued reliance on coal, untaxed fossil fuel consumption, and poor enforcement of Indonesia’s laws against deforestation by burning threatens Indonesia’s unique ecosystems, exacerbates air pollution and contributes to rising greenhouse gas emissions, the OECD adds.
The survey is accompanied by the OECD’s 2016 Open Government Review of Indonesia, which outlines the policies needed to foster a culture of integrity in the public sector, encourage innovation, and promote greater citizen participation.
Among the Review’s recommendations is the need to improve the quality and quantity of data and information accessible to the public throughout the budget cycle. It also suggests that Indonesia develop a coherent approach on the use of digital technologies across levels of government.
Participatory platforms should be expanded to achieve a critical mass of users, and other potentially high-impact initiatives should be enhanced and streamlined. The Review also recommends that the government continues to strengthen the link between its open government agenda and its efforts to implement the Sustainable Development Goals (SDGs).
Launching the two reports in Jakarta alongside the OECD-Indonesia Programme of Work for 2017‑18, OECD Secretary-General Angel Gurría said: “More and more Indonesians are enjoying higher standards of living thanks to Indonesia’s remarkable economic and social progress. Many challenges remain, but the government is moving in the right direction by reducing obstacles to doing business, improving the investment environment, and cutting subsidies.”
“The OECD’s relationship with Indonesia continues to deepen, and we stand ready to support Indonesia’s strategic priorities and reforms in key areas,” he said.
The new Programme of Work will focus on the business climate; social policies; governance; and the environment to promote dynamic, inclusive and green growth. The OECD will also contribute to Indonesia’s efforts to implement the SDGs.