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Bali's economy faces growing risks as the government plans to increase the Value-Added Tax (VAT) rate from 11% to 12% starting January 1, 2025. The move comes at a time when Bali is already grappling with a widening regional budget deficit. Experts warn this combination could significantly strain the island's financial stability.
Economic observer and former Bank Indonesia head for the Bali-Nusra region, Viraguna Bagoes Oka, highlighted the island's precarious fiscal position. Bali's 2024 regional budget of IDR 6.9 trillion is already under pressure, and the deficit is expected to worsen in 2025. Viraguna urged Bali to move away from traditional revenue models and adopt innovative fiscal strategies.
According to him, Bali must reduce its reliance on central government transfers like the General Allocation Fund. Overdependence on these funds has made the region vulnerable to national economic fluctuations. Oka proposed that Bali tap into untapped opportunities, including airport management, foreign investment, and visa-on-arrival revenues. These areas, he estimated, could generate up to IDR 12 trillion annually and improve fiscal independence.
Declining purchasing power
The VAT increase is also expected to erode consumer purchasing power, particularly through higher food and beverage costs. This could further impact Bali's tourism-driven economy, which heavily relies on consumer spending.
Professor Dr. IB Raka Suardana, Dean of the Faculty of Economics and Business at Undiknas University, expressed concerns about the potential impact on public infrastructure and business-support funding. However, he remained cautiously optimistic. He said Bali's tourism and hospitality sectors could help cushion the blow if businesses continue to innovate and improve service quality.
Suardana emphasized that businesses less reliant on government spending might fare better, especially if tourism remains stable. Still, the VAT hike represents a significant challenge to regional economic resilience.
As Bali faces a dual threat from a higher VAT and a worsening deficit, experts stress the need for urgent fiscal reform. Strategic management and innovation will be critical to protecting the island's economic stability and fostering growth in 2025 and beyond.