Global Money, Domestic Vulnerability

Rising global borrowing costs expose Indonesia's fiscal weaknesses, making efficient spending, credible governance, and accountable management of public wealth more urgent.

The price of money is increasingly determined beyond Indonesia's borders. When US Treasury yields rise, emerging economies face more intense competition for capital, investors demand higher returns, and governments must borrow at greater cost.

Indonesia is no exception. Costly initiatives, including the Free Nutritious Meals program (Makan Bergizi Gratis) and Red and White Village Cooperatives (Koperasi Desa/Kelurahan Merah Putih), are expanding fiscal commitments while government revenues remain insufficient to cover planned expenditures. The resulting financing gap places additional pressure on already constrained public finances

Indonesia cannot escape global financial pressures. The question is whether its fiscal institutions, revenue capacity, and spending priorities are strong enough to withstand them.

The Real Burden of Public Debt

Indonesia's government debt stood at a reported 40.46% of GDP at the end of 2025, well below the United States' 99% ratio for federal debt held by the public. Yet this comparison offers limited reassurance.

Indonesia's 2026 budget outlook allocates Rp 582.24 trillion to debt-interest payments alone—resources unavailable for education, infrastructure, and other development priorities.

The United States carries a much larger debt burden but benefits from deeper capital markets, a stronger capacity to mobilize public revenue, and the dollar's position as the world's principal reserve currency. Indonesia enjoys no comparable financing privilege.

Debt sustainability is therefore not simply a question of how much a country owes, but how much it can afford to pay.

The End of Easy Money

Years of exceptionally low global interest rates encouraged the assumption that capital would remain abundant and inexpensive. That era can no longer be taken for granted.

Higher US Treasury yields can raise the returns investors demand on Indonesian government securities. Volatile capital flows can pressure the rupiah, complicate inflation management, and constrain monetary policy. Indonesia cannot dictate global financial conditions. Its response must be to reduce domestic vulnerabilities through four essential reforms.

The yield gap between Indonesian and US 10-year government bonds has narrowed sharply, reaching approximately two percentage points in 2026.

First, Spend Better, Not Merely Less

Fiscal discipline is too often confused with expenditure cuts. But fiscal prudence should be measured by the economic and social value each rupiah delivers. A poorly designed program remains wasteful regardless of its size. Conversely, investment in education, research, and infrastructure supporting industrial development can strengthen productivity, growth, and future government revenue.

Indonesia needs systematic spending reviews, independent program evaluations, and rigorous assessments of economic and social returns. The priority is to eliminate duplication, inflated costs, and ineffective programs while protecting productive investment.

Second, Make Public Revenue Accountable

Public willingness to pay taxes depends partly on confidence that government will use the money responsibly. Persistent corruption and weak accountability undermine that trust.

Indonesia should consider dedicated revenue mechanisms for national priorities, particularly education and the energy transition. An education levy or appropriately designed energy-related tax could finance specific programs through transparent, legally established arrangements rather than disappear into general revenue.

Yet earmarking alone cannot guarantee efficiency. Such arrangements must remain within the public budget, subject to independent audits, measurable outcomes, and transparent reporting.

The 2024 education-budget controversy illustrates the danger. Of the Rp 665 trillion allocation, roughly Rp 346.5 trillion fell under regional transfers, prompting disputes over the classification of village-related spending. Meeting a constitutional spending target means little without evidence that the expenditure improves education.

Third, Confront Fiscal Leakage with Evidence

Claims that Indonesia loses as much as 30% of public spending through leakage have circulated since the Soeharto era. Yet the figure remains difficult to substantiate, not least because corruption, inflated procurement, administrative inefficiency, and wasteful programs are often conflated.

Indonesia needs an independent assessment of where public money is lost and why, supported by transparent procurement, stronger expenditure tracking, risk-based audits, and credible enforcement. Simply cutting or reallocating budgets will not solve the problem. Genuine fiscal reform requires eliminating the sources of waste, not merely changing how public money is distributed.

Fourth, Make Danantara Accountable for Returns

Danantara raises a fundamental fiscal question: how should Indonesia's state-owned wealth contribute to national development and public finances?

Retaining corporate earnings for reinvestment may be economically justified, but it also means foregoing dividends that could otherwise finance the state budget. That trade-off demands transparency. Danantara should disclose its investment objectives, consolidated financial performance, risks, and expected development returns, including potential liabilities arising from government guarantees. Its success should be measured not by assets under management or investment announcements, but by sustainable returns and greater public value than alternative uses of those resources.

Credibility Is Economic Capital

Borrowing can support economic growth when it finances productive investment and strengthens future government revenue. But when debt finances inefficient spending or compensates for weak fiscal management, it creates obligations without building the capacity to meet them.

Indonesia cannot control global interest rates or international capital flows. It can, however, strengthen its resilience through disciplined borrowing, more effective public spending, and institutions that sustain investor confidence. In an increasingly uncertain financial environment, the credibility of domestic economic management is itself a valuable asset.