Indonesia is charting a bold new course for its economy as President Prabowo Subianto and Finance Minister Sri Mulyani Indrawati unveil plans that seek to balance ambitious social welfare programs with reforms aimed at strengthening the nation’s tax base. The government’s latest draft budget and policy statements, delivered in the run-up to Indonesia’s independence day, paint a picture of a country determined to expand its economic footprint while ensuring that prosperity reaches all corners of society.
During his first state address to parliament on August 14, 2025, President Prabowo wasted no time in highlighting the resilience of Indonesia’s economy. According to AFP, he noted, “Amid political conflict, global economic conflict, (and the US) trade war... Indonesia still managed to grow above five percent.” The country’s second-quarter economic growth clocked in at 5.12 percent, handily beating expectations even as global uncertainty loomed. For many Indonesians, this figure is more than just a number—it’s a sign that the nation is weathering international storms with surprising agility.
But Prabowo’s speech was about more than numbers. He signaled a clear intent to use Indonesia’s economic momentum as a springboard for social transformation. The president defended his administration’s much-debated free school meal program, which targets 20 million schoolchildren and pregnant mothers in a bid to tackle childhood stunting. “Our goal... is to be free from poverty, free from hunger, free from suffering,” Prabowo said, as reported by AFP. The initiative, while ambitious, has drawn scrutiny over its funding and execution. Critics point to recent budget reallocations—some of which sparked protests earlier this year—as evidence that the government’s welfare ambitions may be straining public finances.
These fiscal concerns are not lost on policymakers. Finance Minister Sri Mulyani Indrawati took center stage at a press conference in Jakarta on August 15, 2025, outlining a series of tax reforms designed to ensure that Indonesia’s economic growth is both inclusive and sustainable. According to ANTARA, Indrawati emphasized, “Thus, we will not tax them beyond their capacity,” referring to efforts to guarantee fair taxation for all taxpayers, including those in the informal sector. She stressed that the government aims to design compliance measures for both the formal and informal sectors, with a particular focus on supporting micro, small, and medium enterprises (MSMEs).
Under Law No. 7 of 2021 on the Harmonization of Tax Regulations, MSMEs operated by individual taxpayers enjoy tax-free income up to Rp500 million (about US$31,000). For those with annual turnover up to Rp4.8 billion (roughly US$297,000), the final income tax rate is just 0.5 percent. Indrawati explained, “We hope this will make MSMEs feel supported, because many perceive that all businesses, especially small ones, are burdened by taxes.” This approach, she argued, is designed to encourage voluntary compliance among the informal sector, a segment of the economy that has traditionally operated outside the reach of tax authorities.
But there’s a tougher side to the government’s plans as well. The 2026 Draft State Budget and Financial Notes (Book II) identifies the eradication of the shadow economy as a key strategy for boosting state revenue. In 2025, the government began preparing a Compliance Improvement Program (CIP) that includes mapping the shadow economy and deploying intelligence analysis to strengthen law enforcement against high-risk taxpayers. These efforts are complemented by measures such as integrating taxpayer identification numbers with national ID numbers and canvassing to collect data on unregistered taxpayers. The message is clear: while the government is keen to support small businesses, it is equally determined to close loopholes that allow illegal or unregistered enterprises to evade taxes.
President Prabowo’s administration, which took office in October 2024 following a campaign promising policy continuity and economic transformation, faces a delicate balancing act. On one hand, the government is keen to push ahead with state-driven growth, positioning Indonesia as a global economic force. On the other, it must manage the fiscal pressures that come with expansive social programs and the need for robust tax collection.
The president’s free lunch scheme, for instance, has been both lauded as a necessary intervention to address malnutrition and criticized for its cost and implementation challenges. Earlier this year, protests erupted over budget reallocations that were made to finance welfare projects and a new sovereign wealth fund. These demonstrations underscored public anxieties about whether Indonesia can afford such sweeping initiatives without jeopardizing fiscal stability. Yet, Prabowo has remained steadfast, insisting that the ultimate goal is to “be free from poverty, free from hunger, free from suffering.”
Meanwhile, the government’s tax reforms are being rolled out with a careful eye on fairness and capacity. Finance Minister Indrawati has repeatedly stressed that compliance measures should not overburden taxpayers, especially those in the informal sector. The hope is that by making tax rules more transparent and supportive, especially for MSMEs, more businesses will voluntarily enter the formal economy. This, in turn, should help broaden the tax base and generate the revenue needed to fund welfare programs without resorting to new taxes.
Indeed, Indrawati has made it clear that there will be no new taxes in 2026—only reforms. As reported by ANTARA, she stated that the government’s primary focus is on curbing illegal activities in the shadow economy, not raising additional taxes. This approach is designed to reassure both businesses and the public that the government’s revenue-raising efforts will not come at the expense of economic dynamism or social equity.
Indonesia’s economic story in 2025 is thus one of cautious optimism. The country is growing faster than many of its peers, with unemployment at its lowest level since the Asian financial crisis. At the same time, the government is pursuing an ambitious agenda that seeks to marry economic growth with social justice—a vision that is not without its risks and critics. As Prabowo prepares to present the 2026 budget ahead of the nation’s independence day celebrations, all eyes will be on whether his administration can deliver on its promise of prosperity for all Indonesians.
The stakes are high, and the path forward is anything but certain. Yet, the government’s willingness to tackle tough issues—from shadow economy reform to welfare expansion—signals a determination to chart a new course for Indonesia. Whether these efforts will succeed remains to be seen, but for now, the country’s leaders are betting that fair taxation and bold social programs can go hand in hand.
