Joint World Bank-BKF report published circa 2015 found that taxes and spending policies in Indonesia had a very modest impact on inequality relative to other countries. This paper revisits the topic and updates the analysis applying the same methodology to data from 2017. The fiscal reforms that took place during the period covered in the analysis (2012-2017) make this a particularly interesting context for a comparative evaluation of the relative efficacy of the various instruments of fiscal policy on outcomes such as poverty and inequality. The analysis covers indirect taxes such as VAT and excise that accounted for 22 and 27 percent of overall revenue in 2012 and 2017 respectively. On the expenditure side, this analysis covers some of Indonesia’s major social assistance programs (PKH, PIP and Rastra/BPNT), energy subsidies (both fuel and electricity) as well as spending on education and health. Together, these accounted for 54 percent of the primary government spending in 2012. In 2017, largely because of the rolling back of energy subsidies, the number had declined to 40 percent. The main finding is that the vital reforms Indonesia has made on spending better have had some positive results. Eliminating energy subsidies enabled the Government of Indonesia to maintain the overall impact of fiscal policy on poverty and inequality reduction on a much smaller outlay.

In the context of 2020, the report covers the impact of COVID-19 pandemic on poverty. It highlights the continued relevance of the fiscal incidence analysis of the kind presented in this report also in the coming days. Estimates suggest that conditional on how long the containment measures need to be applied, the impact on poverty in Indonesia could be between 2.0 to 2.9 percentage points. This would translate into about 5.5 million to 8 million COVID-induced poor in 2020. If the worst-case macroeconomic scenario currently projected (GDP contracts by 2.0 percent) were to materialize, these estimates imply a complete wiping out of accumulated gains in poverty reduction achieved over the last seven years. The Indonesian government response to COVID-19 has been significant. With a doubling in both spending and coverage, there is a good chance that most of the poor and vulnerable will be nominally protected from welfare losses due to COVID-19.