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The Prabowo Subianto administration begins 2025 with a massive Rp 306 trillion fiscal spending cut, representing over 8% of this year’s state budget, delivered by Presidential Instruction 1/2025.
The policy, Prabowo claims, is primarily meant to help finance the free nutritious meal (MBG) program, the centrepiece of his election campaign, and rebuild the nation’s dilapidated schools.
While a spending cut is necessary on some occasions, the way in which the Prabowo government plans to implement it begs many questions. It is ill-timed, poorly designed and, more importantly, lacks a clear purpose to justify itself. It exposes a glaring lack of leadership in Prabowo’s economic policy.
Untimely budget cuts
Moreover, the policy is untimely given Indonesia’s macroeconomic conditions.
The country’s fiscal position remains robust. Despite facing debt repayment of Rp 800 trillion due in 2025, most of this is in the form of government bonds (SBN), with investors likely to maintain their positions through revolving mechanisms, convinced by reliable returns and Indonesia’s long-term fiscal prudence.
Public debt remains well below legal limits, while the fiscal deficit for 2024-2025 is projected to stay under the 3% ceiling. Price stability has also been maintained effectively, with 2024 inflation at just 1.57% year-on-year (y-o-y), well within Bank Indonesia’s target range of 2.5%±1%.
Rather than inflationary risk, Indonesia is now facing deflationary pressure. January 2025 recorded the lowest y-o-y inflation rate in 25 years at 0.76%, following one of the longest deflation streaks in 2024, when prices declined for five consecutive months from May to September.
While inflation can make goods unaffordable, deflation often signals weakening purchasing power and declining demand – conditions that call for expansionary policies, not contractionary measures.
This is why Prabowo’s budget cuts look misguided. Not only do they threaten Prabowo’s ambitious 8% growth target, they may also make just maintaining the current 5% growth rate much more challenging.
Efficiency or austerity?
It is hard to say if the spending cut counts as a full-fledged austerity measure, although several media outlets have describe it as such.
One of the main issues with Prabowo’s proposed budget cuts lies in its design. On the one hand, Finance Minister Sri Mulyani says that the move focuses on improving the efficiency of budget allocation without affecting fiscal posture. If this claim is valid, then the total budget for government spending in 2025 will not be reduced, only allocations will change to align with the new administration’s agenda and be reprioritized to have the most significant impact on society.
Given the difficulties Indonesia has long faced in raising tax revenue, any initiative to improve public spending effectiveness is always welcome. However, no one can be sure it really is a pure efficiency measure that won’t affect the amount of the total spending budget. This is because a clear and official budget reallocation plan is still lacking.
In various public appearances, Prabowo indicated that the Rp 306 trillion reduced budgets for ministries, government agencies, and regional transfers would be used to fund the full roll-out of the free-nutritious-meal (MBG) program and other projects in his campaign manifesto, the Asta Cita. Yet, there is a significant discrepancy between the costs of Prabowo’s priorities and the budget savings targeted in Presidential instruction 1/2025, which are far greater.
The extension of the free-nutritious-meal (MBG) program requires an additional Rp 100 trillion, while the free medical check-up initiative will cost less than Rp 5 trillion for the initial stage. Combined, this still leaves the gigantic sum of Rp 200 trillion in budget savings unaccounted for. It will be challenging to spend all these budget savings in 2025 – all the more so now that moving to the new capital (IKN) is no longer Prabowo’s priority in the foreseeable future, with further work frozen for the time being.
The claim that budget savings are necessary to fund school renovation projects across the Indonesian archipelago is also unfounded, as it is not reflected in the new budget structure of the Ministry of Primary and Secondary Education. Instead, the total budget for basic and secondary education has been slashed by Rp 8 trillion, creating problems for the administration’s policy of improving access to education.
Without a concrete and commensurate increase in new spending allocation, what was initially planned as an efficiency measure could turn into an austerity policy, resulting in a net fiscal tightening.
Accountability matters
As a long-time critic of government spending inefficiency, Prabowo’s proposed budget cut is understandable. However, cutting costs in itself will not necessarily guarantee a more efficient allocation of taxpayers' money. If the efficiency measure is to succeed, the current administration must be willing to embrace more transparent and evidence-based criteria to guide the budget cuts.
Currently, there are no clear criteria on what constitutes wasteful spending. According to Presidential instruction 1/2025, only spending on staff salary and social assistance are exempted from the cuts. Prabowo has also said on various occasions that non-essential travel spending needs to be substantially cut to allow space for more urgent needs. These principles are so vague and general that they risk stopping essential spending in many sectors.
According to the OECD Spending Better Framework, regular spending reviews are needed to identify opportunities for budget reallocation. This mechanism aims to ensure that bottom-up aspirations are catered for and that efficiency measures are implemented in a transparent and accountable manner.
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What’s the tradeoff?
During the review period, two sets of principles can help gauge the effectiveness of public spending.
First, it is crucial to monitor whether a program effectively meets its stated goals.
For instance, the development of a new airport that fails to attract a sufficient number of travelers should serve as a clear warning sign, justifying the discontinuation of similar initiatives in the future. On the other hand, the expensive travel and accommodation spending that is necessary to ensure that health services can reach remote areas such as Yahukimo in Papua’s Pegunungan district should not automatically categorised as non-essential. In short, not all travel expenditures are created equal.
Second, performance evaluation must be paired with a comprehensive budget impact analysis. Decision-makers need to understand both the economic and social returns for every rupiah of government spending to ensure efficient resource allocation that maximises impact.
For instance, proposed budget cuts to irrigation systems could immediately reduce agricultural productivity in key food-producing regions like Java and Sumatra. While these cuts could increase funding for MBG, which promises to enhance nutrition, education, and long-term economic outcomes, the short-term economic benefits are less certain.
This exemplifies a classic policy dilemma: trading off short-term costs for a longer-term gain. In this case, sacrificing immediate agricultural productivity through reduced irrigation investment can only be justified if MBG's long-term socioeconomic benefits substantially outweigh the short-term costs to the agricultural sector.
Free-wheeling economic policy
So far, none of these good governance principles are reflected in Prabowo’s budget cuts process. Nor has the government used the best available evidence to guide bureaucrats in making the necessary savings.
This reveals concerning patterns in the current administration’s approach to economic policymaking. Prabowo’s tendency toward a so-called "viral-based policy" approach has become increasingly evident and problematic. This strategy involves implementing sudden, poorly-founded policies, then retracting them upon public backlash – as seen in the short-lived 3kg LPG crisis and the value-added tax rate hike saga.
It is not impossible that Prabowo’s proposed budget cut could face the same fate if it triggers sufficient public outrage in the process.
While this creates a narrative of presidential responsiveness to public concerns, it actually exposes weak policy coordination and indecisive leadership in economic management. If it continues, such policy volatility can erode investor confidence and create unnecessary market uncertainty.
Previous administrations benefited from clear economic leadership structures. Vice presidents like Jusuf Kalla under both SBY and Jokowi (in his first term), and key figures like Boediono under SBY and Luhut Binsar Panjaitan under Jokowi, effectively managed economic policy coordination.
In contrast, Prabowo's current right-hand man, Sufmi Dasco, operates primarily in the legislative sphere with limited influence over government agencies and ministries in charge of making actual economic policy changes.
Advisory bodies like the National Economic Council (DEN) and presidential special envoys (UKP), which should provide alternative perspectives on economic policy, have had minimal influence on actual policy formation – an unsurprising outcome given their organisational structures, which do not include a direct command line to sectoral ministries.
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The stakes are high for Indonesia
This structural weakness in economic policy coordination could have long-lasting implications for Indonesia's development trajectory.
Without quickly addressing this leadership vacuum and developing more coherent, evidence-based economic policies, the administration risks continued policy volatility. The stakes are high: Indonesia's macroeconomic stability, business predictability, and overall economic growth trajectory hang in the balance.
The current budget cut measures serve as a stark warning that without improved coordination and more decisive economic leadership, Prabowo's grand economic vision may remain just that – a vision, disconnected from the practical realities of policy implementation and the complex challenges of economic governance.
