Main Logo
INSIGHT/INDUSTRIES/FINANCE
GOVERNMENT SPENDING CUTS IN 2025: ECONOMIC GROWTH AT RISK?
By Samudera Harimurti
March 18, 2025
10 Min Read
shareShare
sharePrint
shareDownload

Government Spending Cuts in 2025: Economic Growth at Risk?
 

 

Government expenditure policy is a key instrument in fiscal policy used to intervene in the economy. Through this policy, the government allocates resources to meet public needs, such as spending on goods, capital expenditures, social assistance, and grants. Government spending not only plays a role in the implementation of the State Revenue and Expenditure Budget (APBN) but is also a crucial component in the formation of Gross Domestic Product (GDP). Mathematically, GDP is formulated as Y = C + I + G + (X-M), where G (government expenditure) reflects the direct contribution of the government in driving economic growth. Keynesian Classical Theory emphasizes the importance of the government's role in stabilizing and maximizing economic growth through monetary policy (such as regulating interest rates and money supply) and fiscal policy (through taxation and government spending). Fiscal policy, particularly government expenditure, becomes a primary tool for managing the economy, especially in situations where market mechanisms fail to adequately provide public goods and services.

To achieve GDP growth targets, the government can regulate the allocation and level of state expenditures. For example, by increasing spending in certain sectors, the government can stimulate job creation toward full employment. If state revenues are insufficient, the government can implement a budget deficit. Keynesian theory states that economic growth is determined by the level of consumption expenditure, government spending, investment, and net exports. The equation Y = C + I + G + (X- M) shows that an increase in government spending (G) directly contributes to national income (Y). By comparing the value of G to Y over time, the contribution of government spending to national income formation can be assessed.

On January 22, 2025, President Prabowo issued Presidential Instruction No. 1 of 2025 on Expenditure Efficiency in the Implementation of the State Revenue and Expenditure Budget and Regional Revenue and Expenditure Budget for the 2025 Fiscal Year (Inpres 1/2025). Point 2(a) states the need for budget cuts amounting to Rp256.1 trillion across several ministries and agencies. Meanwhile, point 3(2) explains that the budget cuts cover operational and non-operational expenditures, including office operational costs, maintenance, official travel, government assistance, infrastructure development, and procurement of equipment and machinery.

Budget cuts must be supported by proper analysis and measurement of the implications of such actions. Given the high potential for corruption in budget usage, it is essential to identify which budgets carry a high risk of corruption. However, the issuance of Inpres 1/2025 is suspected to have been done without evaluating the effectiveness and efficiency of previous budget usage, such as wasteful meeting budgets, procurement of unnecessary equipment, or excessive incentives for public officials. Additionally, the budget cuts are suspected to have been implemented without comprehensive analysis or impact assessment of the efficiency policy.

First, the budget cuts were carried out non-transparently, potentially hindering citizens' access to basic services. Second, this efficiency policy did not undergo a benefit analysis, especially for procurement expenditures in ministries/agencies that are irrelevant to the public. This contrasts with the concept of government spending, which should drive economic growth.

The impact of this efficiency is felt most by the middle class, who are often the most affected by policy changes. Some negative effects include:

  • Efficiency Effect: Businesses reliant on government spending, such as hotels and service sectors, are impacted by cuts in official travel and government projects. This could reduce public purchasing power and slow economic growth in regions dependent on APBN and APBD.

  • Mass Layoffs: Waves of layoffs for contract workers and employees in industries reliant on state budgets weaken the middle class's economic capacity.

  • Economic Slowdown: The middle class tends to save wealth in real assets (gold and property) rather than consuming, slowing economic circulation.

  • Public Perception: Economic decline reduces public trust and foreign investor confidence in Indonesia's economic stability.

Budget Priorities: Significant budget allocations for defence, police, and intelligence, without proportional cuts, raise questions about the government's priorities.


This situation has sparked criticism from students, manifested in the #IndonesiaGelap movement, demanding concrete solutions for public welfare and sustainable national development. Additionally, the efficiency policy is suspected to primarily fund the security sector, potentially increasing repressive actions by security forces and worsening violence against civilians. Weak accountability mechanisms further heighten the risk of corruption.




Have questions or need assistance?
Main Logo

FOLLOW US

office@mores.id

(+62)21 31912101

office
Lina Building, 2nd Floor Unit 211
JL. Rasuna Said Kav. B7
South Jakarta 12910 - Indonesia
Workshop
At Braga Tech Office
Jl. Cilaki No.23, Bandung Wetan
Bandung City 40114 - Indonesia