Better revenue administration, tax policy, and public spending will help meet development priorities
WASHINGTON D.C., November 16, 2017 – The World Bank’s Board of Executive Directors approved a $300 million loan on November 1, 2017 that will help improve the quality of government’s spending, revenue administration and tax policy.
“Building on the substantial progress to date, further fiscal reforms are needed so Indonesia can meet its aspirations. Effective design and implementation of taxation and spending policies can directly and indirectly improve the lives of poor and vulnerable families by making tax systems become more efficient and fair and by better resourcing the government to provide critical services such as health, social assistance, and infrastructure,” said Rodrigo A. Chaves, World Bank Country Director for Indonesia.
Indonesia has one of the lowest revenue-to-GDP ratios in East Asia and the Pacific. The revenue gap is caused by a persistently low compliance rates, and also partly due to sub-optimal tax policy design which has led to a limited tax base and difficulties in its administration.
“Without a major reform in revenue collection, along with the continued moderation of commodity prices, Indonesia’s revenue to GDP ratio may remain at a lower level. This would severely constrain the fiscal space for spending on development priorities,” said Hans Anand Beck, World Bank Lead Economist and team leader for the operation.
The Second Indonesia Fiscal Reform Development Policy Loan supports the government’s reforms to improve revenue collection by broadening the tax base and increasing the compliance rate for individual and corporate taxpayers. More medium term budgeting and earlier procurement as well as monitoring of subnational spending will support efficient and effectiveness of public spending, including for health, capital expenditure for infrastructure, and social assistance.
This financing is the second of three loans to support Indonesia’s fiscal reforms. The first loan supported reforms that included larger allocations for healthcare and social assistance programs, and reducing VAT exemptions for some consumption goods, which helped some lower-income families escape poverty.
The World Bank’s support to fiscal reforms in Indonesia is an important component of the World Bank Group’s Country Partnership Framework for Indonesia, which focuses on government priorities that have potentially transformational impact. This development policy loan builds on fiscal reforms supported by other World Bank programs related to public financial management. It was also prepared in collaboration with the French Government’s Agence Française de Développement