Indonesia's middle class has shrunk by 10 million people, devoured by rising prices, eroded by debt installments, burdensome policies, and even being shunned by various taxes. Due to the declining number and purchasing power of the middle class, household debt growth in 2024 will slow to below 6%, lower than the 9% growth in 2023. The Infobank Research Bureau predicts that the number of the middle class will still shrink in 2025 due to four factors. The banking industry must be aware of the middle class's stalled debt. Why is the Joko Widodo administration, which is continued by Prabowo Subianto, not siding with the middle class?
THE 2025 calendar has been opened. It brings heavier challenges for society. Business actors are bracing themselves to navigate the Year of the Wood Snake—a zodiac sign believed to carry traits of introspection and mystery. Equally mysterious is the ambiguity surrounding 2025, filled with uncertainties.
On a global scale, economic prospects are dimming due to shifts in the geopolitical and economic landscape following the return of Donald Trump as President of the United States. Trump is likely to impose high tariffs on other countries, which would slow down economic growth in China and Europe. Additionally, a stronger U.S. dollar would pressure global currencies and trigger capital outflows from emerging markets.
On a domestic scale, business players are also held hostage by the uncertain economic outlook under President Prabowo Subianto’s leadership. Barely 100 days into his term, apathy and distrust have emerged among the public, especially within the middle class. This is because Prabowo’s actions thus far do not align with the many promises and statements spread across social media, such as pledges to eradicate corruption, streamline bureaucracy, reduce burdens on citizens, and create jobs.
In less than 100 days in office, Prabowo Subianto has already violated his own Asta Cita (Eight Aspirations), one of which includes strengthening political, legal, and bureaucratic reforms, as well as bolstering anti-corruption measures. Before becoming president, Prabowo fiercely declared that he would pursue corruptors even to Antarctica. However, as president, he now appears lenient, offering amnesty to corruptors willing to return their stolen assets.
Prior to his inauguration, Prabowo, through his brother Hashim Djojohadikusumo, stated that he would pursue 300 tax evaders in the natural resources sector, who had caused the country to lose Rp 300 trillion in potential revenue. Hashim claimed this Rp 300 trillion figure came from data provided by Luhut Binsar Pandjaitan and Head of BPKP Muhammad Yusuf Ateh, as confirmed by the Ministry of Environment and Forestry (KLHK).
The figure presented by Hashim closely aligns with data revealed by The Asian Post’s research in early 2024, which stated that between 2014 and 2023, the state lost revenue amounting to Rp 315.79 trillion. This figure stems from indications of under-invoicing in exports, where the recorded export value in Indonesia is lower than the actual import value of goods in the destination country. Specifically, in coal exports alone, there was a statistical discrepancy between the recorded value and the prevailing global market price during Joko Widodo’s administration, amounting to $ 323.89 billion or approximately Rp 4,858.42 trillion. Assuming a 1.5% income tax (PPh) rate and a 5% royalty, the state revenue loss amounts to Rp 315.79 trillion.
However, after taking office, President Prabowo has not taken any steps to fulfill these promises. Amid the declining purchasing power of the public, the Prabowo administration insists on increasing the value-added tax (VAT) rate from 11% to 12% starting in 2025. Adding to the frustration, motor vehicle users will face new charges in the form of additional levies known as “opsen,” including surcharges on Motor Vehicle Tax (PKB) and Vehicle Ownership Transfer Fees (BBNKB). This means motor vehicle users will be taxed across seven components: BBNKB, opsen BBNKB, PKB, opsen PKB, SWDKLLJ (Mandatory Contributions for Road Traffic Accident Funds), administrative fees for vehicle registration certificates (STNK), and license plate issuance fees (TNKB).
Chasing the potential Rp 300 trillion in lost state revenue would be far more impactful than draining the already strained finances of the public. According to Infobank Research Bureau, increasing VAT from 11% to 12%—a 9.09% increase—will add about Rp 75-80 trillion to the state treasury. After allocating Rp 25-30 trillion for subsidies to mitigate the VAT increase and provide electricity and basic food discounts to the lowerincome population, the government would still receive approximately Rp 50-55 trillion.
The Prabowo administration is indeed burdened by the legacy debt of Joko Widodo’s government, which has reached staggering levels. According to Infobank Research Bureau, government debt during Jokowi’s first term rose from Rp 2,609 trillion to Rp 4,779 trillion in 2019 and ballooned to Rp 8,680 trillion by November 2024. In 2025, the Prabowo administration must repay Rp 800.33 trillion in maturing debt, double the Rp 434.29 trillion due in 2024.
This mounting debt was used to fund infrastructure projects such as toll roads, dams, military equipment purchases, and social assistance programs. The situation becomes even more alarming if such enormous state expenditures are plagued by leaks, as acknowledged by President Prabowo in his speech after taking the oath of office on October 20, 2024. “We must have the courage to admit that there are far too many budget leaks, irregularities, and collusion between political officials, government officials at all levels, and unscrupulous businessmen who are not patriotic,” he stated.
Due to corruption, the cost of economic development in Indonesia is high, as reflected in the country’s high Incremental Capital Output Ratio (ICOR) of 6.5. Neighboring countries have lower ICORs, such as the Philippines at 3.7, Malaysia at 4.5, Thailand at 4.4, and Vietnam at 4.6. A higher ICOR indicates a less efficient economy, as Indonesia requires an additional 6.5% investment-to-GDP ratio to achieve 1% economic growth. A high ICOR also signals significant leaks in development funds.
When comparing the lowest ICOR in the Philippines with Indonesia’s ICOR, there is a difference of 2.8. Dividing this by 6.5 and multiplying by 100 shows that the inefficiency or leakage of development funds in Indonesia amounts to 43.07%. With the 2024 state budget (APBN) of Rp 3,304 trillion, this translates to a leakage of Rp 1,420.72 trillion.
Leaks in state spending occur through various means, such as fictitious projects, stalled projects, cost markups, bribery, project specification manipulation, program duplication, projects that do not meet actual needs, and inefficient program financing. Meanwhile, lost state revenue happens through collusion between tax officials who double as tax consultants and taxpayers, as well as tax evasion in the natural resource sector.
If the government were to address these financial leaks, there would be no need to aggressively pursue taxes, which leave businesses scratching their heads and the middle class sliding downwards, with many falling into near-poverty. Over the past five years, the middle class has continued to shrink from 57.33 million people (21.45%) in 2019 to 53.83 million (19.82%) in 2021, 49.51 million (18.06%) in 2022, 48.27 million (17.44%) in 2023, and only 47.85 million (17.13%) in 2024.
The decline in the middle class is influenced by several factors, including the COVID-19 pandemic, rising prices, burdens from government policies favoring the lower-income population, and the weakening of the Rupiah.
Research by Inventure in September 2024 revealed that 49% of the middle class reported a decline in purchasing power due to several factors: The first is rising prices of basic necessities, such as food, energy, and transportation (82%); The second is education and healthcare costs (52%); The third is stagnant income (45%); The fourth is increasing layoffs and limited job opportunities (37%); The fifth is rising taxes (31%); The sixth is growing debt (27%); The seventh is higher loan repayments due to rising interest rates (23%).
According to Infobank Research Bureau, the middle class is predicted to continue shrinking due to some main factors:
The first factor is New government policies: The increase in VAT to 12%, the implementation of additional taxes, and the imposition of taxes on buildings constructed or renovated independently, as stipulated in the Ministry of Finance Regulation No. 61/ PMK.03/2022 on VAT for Self-Building Activities (KMS) at a rate of 2.4%, starting in 2025. Additionally, the removal of BPJS (National Health Insurance) classes, fuel prices linked to market rates, and commuter train fares based on National Identification Numbers (NIK) will further strain the middle class.
The second factor is Macroeconomic conditions and market dynamics: Rising prices due to the strengthening US dollar and higher loan interest rates caused by liquidity tightening in the market.
The third factor is Low financial literacy: This makes the middle class prone to seeking loans from online platforms (pinjol) without considering the highinterest rates. Tragically, some middle-class individuals turn to online gambling (judol) as a shortcut to pay off their pinjol debts.
The fourth factor is Limited formal employment opportunities: Layoffs (PHK) are expected to persist into 2025. Deputy Minister of Manpower Immanuel Ebenezer has signaled that around 60 companies plan to conduct layoffs soon. In 2023 alone, layoffs reached 64,000 workers, and this number is expected to increase in 2024. In the first nine months of 2024, layoffs had already reached 52,993, a 25.3% increase from September 2023.
The decline in the number and purchasing power of the middle class impacts market demand, which directly affects the real sector. One example is the automotive industry, which has been experiencing a downturn since 2023, a year after the government raised VAT from 10% to 11% in 2022. Car sales, which dropped by 4% in 2023, continued to decline in 2024. In the first 10 months of 2024, sales reached only 710,406 units, a sharp 15.05% drop compared to the same period the previous year. This downward trend in car sales is expected to continue in 2025.
The banking sector has also been affected, particularly the financing industry, which serves as the downstream ecosystem for the automotive industry and will face direct impacts from the implementation of additional taxes in 2024. The reduced purchasing power of the middle class, as the primary target market in the retail segment, will lower credit demand. Furthermore, declining middle-class purchasing power could lead to non-performing individual loans due to an inability to repay credit installments.
According to Bank Indonesia data, the growth of household debt nationally as of September 2024 was IDR3,552.19 trillion, only increasing by 5.77% year-onyear from the position in September 2023 of IDR3,358.30 trillion. The portion of household loans to total loans also decreased from 45.93% (from IDR7,733.88 trillion) to 41.01% (from IDR8,188.32 trillion). In 2023, household debt still grew by 9% to IDR3,453.86 trillion.
The erosion of the middle class inevitably slows household consumption growth, which accounts for about 53% of gross domestic product (GDP). This trend became evident in 2024. When household consumption growth in the third quarter of 2024 yearon-year was only 4.91%, GDP growth was limited to 4.95%. In the second quarter of 2024, private consumption growth was still 4.93%, and GDP growth stood at 5.05%.
The middle class is the main engine of economic growth. Without restoring the size and purchasing power of the middle class, Prabowo Subianto’s aspiration to achieve 8% economic growth will remain an empty promise. Indonesia will continue to be a “hell” for the lower-income population, whose lives depend on state social assistance (bansos). Meanwhile, the middle class will remain a “sandwich,” squeezed to pay taxes that fund social assistance for the lower class, finance the government’s mounting debt, and sustain an inefficient and bloated bureaucracy.
On the other hand, Indonesia is a “paradise” for its officials who can live lavishly. It may also continue to be a “paradise” for corruptors, tax evaders, and unpatriotic entrepreneurs. This reality has been acknowledged by President Prabowo Subianto, who has warned that the culture of corruption poses a grave danger to future generations. Yet, it is puzzling that President Prabowo, who has previously delivered fiery speeches in line with his reputation as a tough Kopassus General, now appears to be a “toothless tiger” seemingly willing to pardon corruptors.
The answer has already been circulating on various social media platforms amid Indonesia’s challenging economic conditions. Whether true or not, one thing is certain: life for the people will only get harder. Prices are soaring. The rupiah is under pressure. Entrepreneurs are squeezed, with many going out of business. The wave of layoffs has not subsided. People struggle to find jobs, and starting a business is no easy feat due to weak purchasing power. Even when a business gets going, the headaches don’t stop, as taxes quickly come knocking.
A senior banker admitted to feeling anxious about the emergence of distrust. “There were many weaknesses in Indonesia toward the end of Jokowi’s administration. The real sector is struggling, fiscal and monetary policies are inadequate, the organization of government structures is poor, and the recovery of public trust is lacking. If communication also fails, we fear that trust will erode further,” he told Infobank last month.
History has proven this before. The severe crises of 1965 and 1998 began with a lack of trust. A 30-year crisis cycle must be avoided. Hopefully, Prabowo Subianto’s administration can take concrete steps to restore public trust, showing that Indonesia is being steered in a better direction. This means implementing policies oriented toward the people’s interests, not those designed to serve the interests of the ruling government.
On a global scale, economic prospects are dimming due to shifts in the geopolitical and economic landscape following the return of Donald Trump as President of the United States. Trump is likely to impose high tariffs on other countries, which would slow down economic growth in China and Europe. Additionally, a stronger U.S. dollar would pressure global currencies and trigger capital outflows from emerging markets.
