Indonesia is considering lifting a statutory cap on government spending that has been in place for more than two decades, as President Prabowo Subianto pushes for faster economic growth.

Supporters argue that greater room to borrow and spend would let Southeast Asia’s largest economy invest its way towards Prabowo’s target of 8 per cent annual growth by 2029. Economists counter that weakening the rule could push up borrowing costs and dent investor confidence.

At issue is the mandatory ceiling that has long limited the budget deficit to 3 per cent of gross domestic product. The measure, introduced in the aftermath of the 1997-98 Asian financial crisis, aimed to restore fiscal discipline and investor trust.

Indonesia’s economy grew 5.11 per cent last year. Policymakers pushing to revisit the limit say greater fiscal flexibility is needed to fund infrastructure and priority projects and to help the country escape the middle-income trap.

Debating the cap in parliament on September 17, lawmakers questioned whether the 3 per cent threshold remained appropriate for an economy seeking faster growth.

“I asked which article stipulates it [the 3 per cent deficit cap], but no one could say,” Mukhamad Misbakhun, who chairs the parliamentary body overseeing financial affairs, told reporters afterwards. Such a cap “is not the norm”, he said, as cited by local media outlet Kompas.

Misbakhun’s commission has been deliberating revisions to Indonesia’s state finance law of 2003, which mandates both the 3 per cent deficit ceiling and a debt ratio cap of 60 per cent of GDP.

This debt ratio was also “not the norm”, he said, arguing that the rigid limit had held back Indonesia’s economic expansion. Misbakhun urged the government to capitalise on the country’s demographic dividend – the economic growth potential created by having a rising share of working-age people – and re-evaluate the deficit ceiling.

On Friday, however, newly appointed Finance Minister Suahasil Nazara said he would hold the line. “We’re using 3 per cent as the maximum state budget deficit. And I’m committed to that,” he said.

The ministry has said it is targeting a deficit of 2.4 per cent of GDP for next year’s budget.

The proposal has stirred debate over whether the cap constrains the nation’s economic potential or serves as proof of its financial discipline and credibility.

Harry Su, managing director of Jakarta-based brokerage Samuel Sekuritas Indonesia, noted that the cap was adopted after a severe economic crisis marked by currency collapse and widespread banking failures.

While it had strengthened fiscal credibility over time, he said it could also “limit government spending, borrowing and economic growth”.

“On the other hand, this 3 per cent cap is the strongest anchor for Indonesia’s macroeconomic stability,” Su said. “Altering it without a watertight framework risks triggering negative market sentiment, credit rating downgrades from global agencies like Fitch or Moody’s and a sharp spike in government borrowing costs.”Both Fitch Ratings and Moody’s cut Indonesia’s credit outlook to negative from stable earlier this year, citing concerns over rising uncertainty and reduced policy credibility.

Rizal Taufikurahman, head of the Institute for Development of Economics and Finance’s Centre of Macroeconomics and Finance in Jakarta, said that lifting the cap might temporarily allow the public to enjoy “additional social assistance, subsidies, infrastructure or public services”.

“However, if such spending does not increase productivity and [state] revenue, the consequences will be greater interest burdens and increasingly limited space for productive spending in the future,” Rizal said.

Dipo Satria Ramli, an economist at the Centre of Reform on Economics Indonesia who attended this month’s parliamentary hearing, strongly opposed scrapping the threshold.

“The government’s new debt next year will be around 870 trillion rupiah (US$48.7 billion), with interest costs reaching 650 trillion rupiah. This means that three-quarters of new debt will be used solely for debt interest payments,” he said.

“We’re borrowing money to pay interest while our tax ratio remains unchanged. We strictly support the deficit ceiling at 3 per cent of GDP.”Taking on additional debt without optimising state expenditure or improving tax collection would yield little benefit, Dipo said.

Indonesia’s tax revenue fell to 9.3 per cent of GDP last year, down from 10.08 per cent in 2024, according to the finance ministry – well below the Asia-Pacific regional average of 19.7 per cent listed by the Organisation for Economic Cooperation and Development.

and Development. “Many foreign investors are closely following this discourse. I met several large fund managers yesterday. They’re following it. I don’t think the market will take it lightly if this limit is removed,” Dipo said.

Any overhaul of Indonesia’s 3 per cent deficit cap must come with strict safeguards to ensure government interest payments do not swallow up too much tax revenue, Rizal said.

Indonesia “relies too heavily” on the deficit and debt caps, he said, even though budgetary pressures were “also determined by the ability of state revenues to pay interest”.

Debt could remain low relative to GDP but the country’s ability to spend would “shrink as interest absorbs more and more revenue”, Rizal said. Improving the quality and governance of state spending is equally critical, according to Su.

“Extra fiscal flexibility does not automatically guarantee ample economic growth to justify the added debt,” he said.

“The outcome depends entirely on the spending quality by the government and here lies the tricky part given continued rampant corruption in Indonesia’s economic growth programmes.”