Critical Notes on Indonesia’s 2026 Fiscal and Economic Policy: Illusory Growth Amid Weakening Purchasing Power, Precarious Employment, and Mounting Fiscal Pressures
Three structural crises are simultaneously eroding the foundations of Indonesia’s economy: weakening purchasing power and the shrinking middle class; large-scale investment that has yet to generate quality employment; and an increasingly constrained fiscal space burdened by rising debt and insufficiently productive public spending. Therefore, Indonesia’s 5.61% GDP growth in the first quarter of 2026 should not be interpreted as evidence of a robust economic recovery, but rather as illusory growth that has failed to address the country’s underlying structural economic problems.
We, the undersigned civil society organisations and independent research institutions—INFID, Publish What You Pay (PWYP) Indonesia, The PRAKARSA, Sahita Institute (HINTS), and the Institute for Development of Economics and Finance (INDEF)—wish to express our deep concern over the direction of Indonesia’s fiscal and economic policies, which we believe have failed to prioritise the interests of the people. Behind the government’s claim of 5.61% GDP growth in the first quarter of 2026—the highest since 2022 (Statistics Indonesia/BPS, 5 May 2026)—lies a far more fragile reality: weakening purchasing power, waves of layoffs, a shrinking middle class, and increasingly alarming fiscal pressures.
INDEF has warned that economic growth in Q1 2026 was illusory and unsustainable. Government expenditure surged by 21.8%, driving GDP growth to 5.61%, largely as a result of seasonal spending during Eid al-Fitr and the payment of the 13th-month salary to civil servants, rather than genuine structural economic transformation.
Economic inequality in Indonesia remains severe, yet conventional poverty indicators fail to capture its true depth. The PRAKARSA recorded a Multidimensional Poverty Index (MPI) of 14.3% (PRAKARSA, 2021), substantially higher than the official poverty rate of 9.7% in the same period. This indicates that millions of Indonesians continue to lack access to healthcare, quality education, and adequate sanitation. Meanwhile, the national Gini ratio of 0.363 in September 2025 (BPS, February 2026) reflects a fundamental methodological limitation: it does not measure inequalities in the ownership of land, shares, and productive assets, where disparities are far more extreme. The wealth Gini coefficient is estimated to be significantly higher. At the same time, the wealthiest 20% of the population account for 44.80% of total national expenditure, illustrating a concentration of wealth that remains largely untouched by existing fiscal policies.
The accelerating contraction of Indonesia’s middle class has left 142 million people vulnerable to falling back into poverty, representing one of the country’s most measurable social risks. The Mandiri Institute’s “Demographic Insights: Dynamics of Indonesia’s Middle Class in 2025” (February 2026) reports that Indonesia’s middle class declined from 47.9 million people in 2024 to 46.7 million in 2025, representing only 16.6% of the total population, down from 17.1% the previous year. The decline of 1.1 million people is considerably steeper than the previous year’s reduction of 0.4 million. Today, 142 million Indonesians, or 50.4% of the population, belong to the aspiring middle class—a group that remains highly vulnerable to slipping back into poverty at any time.
These pressures are clearly reflected in household debt indicators. Per capita consumption growth among the middle class reached only 4.1% year-on-year, the lowest of all income groups. Online lending expanded by 25% to IDR 96.6 trillion (Financial Services Authority/OJK, December 2025), while pawn financing surged by 48% to IDR 130 trillion, signalling that millions of Indonesian households are increasingly relying on debt simply to survive.
The employment crisis has also become increasingly alarming. The Ministry of Manpower recorded 88,519 layoffs throughout 2025, an increase of 13.54% compared to the previous year, followed by 23,470 additional layoffs between January and May 2026 (Ministry of Manpower, June 2026). Ironically, this worsening situation has yet to prompt the government to assume its role as the employer of last resort through effective labour-intensive public works programmes capable of boosting people’s purchasing power. Moreover, INDEF highlights a persistent investment paradox: robust investment realisation has not translated into the creation of quality employment. This is particularly evident where investment is concentrated in capital-intensive sectors, including parts of the downstream mineral processing agenda, without adequate strategies to strengthen domestic industrial linkages, expand regional employment opportunities, improve workforce skills, facilitate technology transfer, and create decent work. Consequently, 60% of Indonesia’s labour force remains employed in the informal sector, earning an average monthly income of IDR 1.9 million, while the average monthly salary of university graduates stood at only IDR 4.63 million as of November 2025—insufficient to support a household above the threshold of middle-class living standards.
Furthermore, this illusion of economic growth must also be understood in the context of the emerging risk of a Green Debt Trap, whereby financing for the green transition and critical mineral downstreaming increasingly depends on debt, fiscal incentives, and foreign direct investment (FDI), without adequate development discipline. The evolving global financial architecture risks further constraining the policy space of developing countries, including Indonesia, in financing their own green economic transformation. Dependence on external financing may intensify competition to attract investment by compromising environmental and labour standards that remain insufficiently robust. Under weak governance conditions, the expansion of critical mineral extraction risks giving rise to a new form of extractivism, in which Indonesia—particularly producing regions and affected communities—bears a disproportionate share of the social and ecological costs, while strategic value addition, technology, and control over supply chains remain concentrated among actors with greater bargaining power. A downstreaming model focused solely on investment, exports, and smelter capacity is insufficient to realise the principles of a Just Energy Transition, particularly when it neglects the rights of Indigenous Peoples, workers’ protection, occupational health and safety, environmental restoration, and the equitable distribution of benefits to producing regions.
Therefore, what is needed is not the abandonment of the downstreaming agenda, but rather stronger discipline over its direction and governance. Critical mineral downstreaming must shift from merely expanding mining operations and smelters toward deepening industrial development, strengthening domestic enterprises, creating decent jobs, promoting local procurement, facilitating technology transfer, decarbonising production processes, and ensuring a fair distribution of fiscal benefits to producing regions. In this way, downstreaming can become an instrument of economic sovereignty and green industrialisation, rather than merely an extension of extractivism under the banner of the energy transition.
On the fiscal front, the 2026 State Budget (APBN) allocation contains a constitutional issue that is currently under judicial review by the Constitutional Court. INFID supports the judicial review of Law No. 17 of 2025 on the 2026 State Budget (Cases No. 40, 52, and 55/PUU-XXIV/2026, Constitutional Court) because IDR 223.5 trillion allocated to the National Nutrition Agency (Badan Gizi Nasional)—equivalent to nearly one-third of the total education budget—has been recorded under the education budget to finance the Free Nutritious Meals (MBG) programme, even though, by law, it does not constitute education expenditure. This practice violates Article 31(4) of the 1945 Constitution.
Meanwhile, the country’s fiscal space is becoming increasingly constrained from multiple directions at once. PWYP Indonesia emphasises that behind the IDR 236.6 trillion in non-tax state revenue (PNBP) from natural resources projected in the 2026 State Budget lies an unresolved fiscal-ecological paradox. These revenues represent an illusion because they are calculated solely based on cash inflows, without ever internalising the costs of ecological destruction, the loss of Indigenous Peoples’ living spaces, and the deterioration of public health. As a result of this distorted fiscal orientation, regions that exploit natural resources continue to be rewarded through Revenue-Sharing Funds (Dana Bagi Hasil/DBH), while regions committed to protecting forests, river basins, and coastal ecosystems are effectively “penalised” with limited fiscal capacity.
This paradox is further aggravated by the central government’s decision to reduce Transfers to Regions (Transfer ke Daerah/TKD) in order to finance centralised programmes such as the Free Nutritious Meals (MBG) programme and other sectoral priorities. Consequently, subnational governments face a double burden: not only are their natural resources depleted and the environmental damage extended beyond administrative boundaries without fair compensation, but their fiscal capacity to restore ecosystems and deliver public services is further weakened as intergovernmental transfers are reduced. The current fiscal regime effectively shifts the burden of environmental restoration and post-mining exit costs onto regional budgets (APBD), while reinforcing an extractivist development model that widens regional inequalities.
As warned by the Sahita Institute (HINTS), the diversion of the entire IDR 308 trillion in budget efficiency savings to Danantara, Indonesia’s sovereign wealth fund, risks creating a model of state capital accumulation with limited public accountability unless accompanied by a clear development mandate, full portfolio transparency, independent audits, parliamentary oversight, public benefit assessments, and strict safeguards against conflicts of interest. These concerns become even more significant in light of plans to channel up to IDR 500 trillion into downstreaming projects. Therefore, every Danantara investment in downstreaming projects must be subject to measurable development conditions, including the creation of decent jobs, technology transfer, domestic value chain deepening, local procurement, production decarbonisation, protection of affected communities, and the equitable distribution of benefits to both the public and producing regions.
These fiscal consequences are compounded by already severe regional disparities. Reductions in Transfers to Regions—which serve as the backbone of local fiscal liquidity to finance public services—in order to support Danantara and other national priority programmes further weaken the fiscal capacity of subnational governments. More concerning still, these strategic programmes have yet to demonstrate a meaningful contribution to stimulating regional economic activity. This explains why the 34.3% reduction in infrastructure spending and cuts to regional transfers risk exacerbating already significant disparities in public service provision, with economic growth in Maluku–Papua reaching only 1.44% compared to 5.30% in Java (BPS, 2026).
JOINT CALL
- Restore the constitutionally mandated allocation of 20% of the State Budget (APBN) exclusively for education, and clearly separate the financing of the Free Nutritious Meals (MBG) programme from the education budget. This revision must be completed before the House of Representatives deliberates the 2027 State Budget Bill (RAPBN).
- Introduce a progressive wealth tax on the super-rich and broaden the tax base in a fair and equitable manner, with the objective of increasing Indonesia’s tax ratio to the ASEAN average of 13–15% of GDP, as a concrete instrument for wealth redistribution.
- Ensure full transparency and public accountability of Danantara. The House of Representatives (DPR RI) must summon Danantara’s Board of Directors to an open public hearing within 60 days, mandate regular independent audits, require full disclosure of financial reports, and establish strict prohibitions against conflicts of interest.
- Expand and strengthen social protection for the 142 million people in the aspiring middle class and the 60% of workers employed in the informal sector; halt budget cuts that undermine essential public services; extend BPJS Ketenagakerjaan coverage to informal workers; and implement sectoral minimum wages based on productivity.
- Undertake comprehensive reform of Indonesia’s fiscal architecture and natural resource governance to ensure that critical mineral downstreaming does not replicate the country’s extractivist development model but instead delivers genuine industrial value addition, decent work, fiscal benefits for producing regions, social and environmental protection, and strengthened national capabilities. This should include:
- Re-pricing and Earmarking: Recalculate royalties, taxes, and levies in the extractive sector so that they more accurately reflect the true environmental and social costs, in accordance with the polluter pays principle. A portion of natural resource revenues should be transparently earmarked for environmental restoration, the protection of affected communities, improved public services in producing regions, and the development of post-mining economic resilience.
- Intergenerational Fund and EITI Transparency: Establish both a stabilisation fund and an intergenerational natural resource fund to ensure that revenues from non-renewable resources are not exhausted as routine government income. All Danantara investments in downstreaming and extractive industries must comply with the Extractive Industries Transparency Initiative (EITI) standards, including disclosure of contracts, beneficial ownership, revenue-sharing arrangements with producing regions, fiscal risks, and measurable public benefit indicators such as decent work, local procurement, technology transfer, and domestic industrial deepening.
- Just Energy Transition: Ensure that all critical mineral downstreaming projects and National Strategic Projects are subject to meaningful consultation and consent from affected communities, protection of the rights of Indigenous Peoples, compliance with occupational health and safety standards, effective grievance mechanisms, environmental restoration, and strict sanctions against projects that dispossess communities of their living spaces or violate the rights of citizens and workers. Mining for transition minerals must not replicate the extractivist practices of the past by transferring social and ecological costs onto local communities.
Signed by:
International NGO Forum on Indonesian Development (INFID)
Publish What You Pay (PWYP) Indonesia
The PRAKARSA
Sahita Institute (HINTS)
Institute for Development of Economics and Finance (INDEF)
Media Contact:
Abdul Waidl
waidl@infid.org