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The country is in a favourable situation to undertake necessary reforms Real GDP is projected to grow at around 6% this year and next, led by robust domestic demand. Monetary policy should, as planned, ensure that inflation will remain on a downward trend, using interest rates, liquidity management and macro‑prudential measures. Indonesia’s infrastructure and social spending needs are substantial and will need to be efficiently financed. A substantial reduction in energy subsidies, which fail to achieve their social goals and have significant fiscal costs, would free up resources for pressing social and economic needs. At the same time, well targeted cash‑transfer schemes will be necessary to keep poverty from worsening and thereby help to overcome resistance to energy price increases. Wide communication on the gains and distributional benefits of this reform, together with a rule linking subsidised fuel prices to international oil prices that does not have to be renegotiated every year would ease implementation.
There is significant scope to raise revenues by improving the tax system and tax administration. Broadening tax bases and improving compliance, particularly by high‑income individuals, would make the system fairer. This should be achieved by allocating more audits where risks of underpayment are higher, making more intensive use of existing information, setting up more large‑taxpayer offices and enhancing administrative capacity. Removing exemptions and raising the tax rate on economic rents in the resource sector would generate higher revenues efficiently. Efforts to bring the self‑employed into the tax net should be reinforced
Faster productivity growth will boost living standards
Formalisation of workers and firms will be a key source of productivity growth and could be encouraged by preventing excessive increases in the minimum wage, introducing a sub‑minimum wage for youth and implementing reforms to make the formal labour market more attractive to workers and firms. One option to effectively protect workers against job‑loss risks in the future would be to introduce limited unemployment benefits coupled with individual unemployment‑insurance accounts. A simplification of the cumbersome licensing process would reduce the administrative burden facing companies.
Notwithstanding a vibrant financial sector, firms’ access to finance could be eased by making the information collected by the credit bureau available to all financial institutions. Underdeveloped financing sources such as venture capital and micro‑finance could be deepened by removing current restrictions to entry. The Master Plan for the Acceleration and Expansion of Indonesia’s Economic Growth, which is meant to speed up infrastructure development, can be supported by additional public outlays without endangering fiscal sustainability. A lack of qualified workers also hampers productivity gains, and public resources should focus on the most cost‑efficient programmes that manage to develop the skills of school dropouts and workers. Support to small firms could be made more effective by clarifying responsibilities within the central government and between it and local authorities, and by consolidating existing schemes. Relaxing those restrictions on inward direct investment that cannot be justified by public‑interest concerns and removing the non‑tariff barriers that are detrimental to trade and growth would also be useful.
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For further information please contact the Indonesia Desk at the OECD Economics Department.
The OECD Secretariat's report was prepared by Annabelle Mourougane and Jens Arnold under the supervision of Peter Jarrett. Research assistance was provided by Anne Legendre.