Jakarta

INDONESIAN President Joko Widodo proposed slightly lower state spending next year that aims to support the pandemic-hit economy while maintaining the goal of gradually cutting the fiscal deficit.

South-east Asia's largest economy is projected to grow 5 to 5.5 per cent in 2022, higher than the 3.7 to 4.5 per cent forecast for this year, he said in his budget speech to Parliament on Monday.

Investments and exports are expected to be the main growth drivers, aided by government spending of 2,708.7 trillion rupiah (S$255.4 billion), slightly lower than the 2,750 trillion rupiah set for this year.

Indonesia faces a delicate balancing act between pushing an economic recovery that's highly dependent on government stimulus and narrowing the budget gap to keep investors' confidence.

To help generate more revenue the government aims to expand its tax base, improve taxpayer compliance and optimise its asset management.

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"Fiscal consolidation and reforms must continue to be carried out in a comprehensive, gradual and measurable manner," Mr Joko said.

That includes the "strengthening of state revenues and the improvement of expenditures", as well as prudent fiscal management "that is sounder, more resilient, and able to maintain future economic stability".

On Monday, the rupiah posted its first gain since Aug 4, strengthening 0.1 per cent to 14,373 to the US dollar. The benchmark stock index fell 0.8 per cent.

Indonesia has become the epicentre of the pandemic as the highly transmissible Delta variant puts it atop the world's list of daily Covid-19 fatalities. The country has lost more than 100,000 lives, with just 10 per cent of its 270 million people fully vaccinated.

The economy expanded 7.1 per cent from a year ago in the second quarter, beating estimates, but renewed movement restrictions since early July will likely limit growth in coming quarters.

The government has begun loosening curbs in several cities as it prepares to reopen sectors of the economy and adjust to living with the virus.

Mr Joko expects the fiscal deficit to narrow to 4.85 per cent of gross domestic product (GDP) next year from the 5.7 per cent expected this year, with 2022 the final year the government is allowed to run a deficit above the 3 per cent statutory limit.

The government aims to collect 1,840.7 trillion rupiah in revenue next year, as the president backed a tax plan that would raise levies on basic goods and services, carbon emissions and the ultra-wealthy.

To help fund the shortfall, the government will offer a net 991.3 trillion rupiah of government bonds next year, down slightly from this year's revised estimate of 992.8 trillion rupiah.

The nation will be selective and prudent in its debt issuance, possibly rounding out its portfolio with a bond offer in non-hard currencies, according to the budget proposal.

There is also about 77.3 trillion rupiah in unspent funds that Indonesia can tap to help raise next year's social-aid spending.

This should help the country bring down the jobless rate to 5.5 to 6.3 per cent, and the poverty rate to 8.5 to 9 per cent in 2022.

The government seeks to eradicate extreme poverty by 2024.

Indonesia's commitment to fiscal discipline, together with the central bank's stance to ensure monetary policy stability, should form "twin pillars of market resilience, despite the often-challenging economic and health circumstances," said OCBC Bank economist Wellian Wiranto.

"Although the exact path remains unknown at this point, the continued reiteration that the government remains keen on getting back to the 3 per cent fiscal deficit rule in 2023 is a good thing from the market perspective," Mr Wiranto added.

However, Indonesia may be hard-pressed to chase higher GDP growth next year if spending is lowered, especially since its recovery has yet to gain momentum, according to Nicholas Mapa, senior economist at ING Groep.

"Growth momentum will have to quickly revert to the pace we saw prior to the onset of the Delta variant for this to happen," he said. "We are unsure if growth will enjoy this much pace should fiscal stimulus be scaled back next year." BLOOMBERG