Behind claims of high growth, millions of citizens face weakening purchasing power, informal employment, household debt pressures, and shrinking fiscal space.
Three structural crises are simultaneously eroding the foundations of the Indonesian economy: weakening purchasing power and a declining middle class, substantial investment that has yet to create quality jobs, and fiscal space increasingly squeezed by debt and insufficiently productive spending. Therefore, the 5,61% GDP growth in the first quarter of 2026 should not be interpreted as a sign of a robust recovery, but rather as a false sense of growth that fails to address Indonesia's structural economic problems.
We, civil society organizations and independent research institutions consisting of INFID, Publish What You Pay (PWYP) Indonesia, The PRAKARSA, the Sahita Institute (HINTS), and the Institute for Development of Economics and Finance (INDEF), expressed deep concern over the direction of Indonesia's fiscal and economic policies, which they deemed unprosperous. Behind the claim of 5,61% GDP growth in the first quarter of 2026, the highest since 2022 (BPS, May 5, 2026), lies a far more fragile reality: weakening purchasing power, waves of layoffs, a shrinking middle class, and increasingly alarming fiscal pressures.
INDEF warned that growth in Q1 2026 was artificial and unsustainable. A 21,8% surge in government spending, pushing GDP growth to 5,61%, was largely driven by seasonal spending during Eid al-Fitr and the 13th month salary for civil servants, rather than structural economic transformation.
Indonesia's economic inequality remains acute, but poverty indicators don't capture its depth. PRAKARSA recorded a Multidimensional Poverty Index of 14,3% (PRAKARSA, 2021), much higher than the poverty rate of 9,7% at the time. This condition indicates that millions of people still lack access to healthcare, quality education, and proper sanitation. Meanwhile, the national Gini ratio of 0,363 in September 2025 (BPS, February 2026) reflects a fundamental methodological limitation: this figure does not measure the much more extreme inequality in land, stock, and productive asset ownership. Wealth Gini, estimated to be much higher. At the same time, the richest 20% of the population controls 44,80% of total national expenditure, reflecting a concentration of wealth untouched by existing fiscal policies.
The accelerating shrinkage of the middle class is placing 142 million people vulnerable to poverty, and this is the most measurable social threat. The Mandiri Institute report "Demographic Insights: Middle Class Dynamics in 2025" (February 2026) shows that Indonesia's middle class will shrink from 47,9 million people (2024) to 46,7 million in 2025, representing only 16,6% of the total population, down from 17,1% the previous year, with a much deeper decline of 1,1 million people than the previous year (0,4 million). Now 142 million people, or 50,4% of the population, are considered poor. aspiring middle class, a group that could slip back into poverty at any time.
This pressure is palpable in household debt data. Middle-class per capita consumption growth was only 4,1% year-on-year, the lowest of all economic groups; online lending grew 25% to Rp 96,6 trillion (OJK, December 2025); and pawn financing surged 48% to Rp 130 trillion, indicating that millions of Indonesian families are surviving on debt.
The employment crisis is becoming increasingly worrying. The Ministry of Manpower recorded 88.519 layoffs (PHK) throughout 2025, a 13,54% increase from the previous year, and an additional 23.470 layoffs from January to May 2026 (Kemnaker, June 2026). Ironically, this situation has not yet prompted the government to take action. employer of last resort through labor-intensive programs that effectively boost people's purchasing power. Moreover, INDEF highlights the investment paradox: the realization of large investments has not been directly proportional to the creation of quality jobs. This is particularly true when investment is concentrated in capital-intensive sectors, including some downstream projects, without adequate strategies to expand local industrial linkages, absorb regional labor, improve skills, transfer technology, and create decent work. As a result, 60% of the workforce is absorbed in the informal sector with an average wage of IDR 1,9 million/month, while the average salary for a bachelor's degree graduate is only IDR 4,63 million as of November 2025, insufficient to support a household above the middle-class line.
Furthermore, this illusion of growth also needs to be read in the context of the risk of a "Green Debt Trap," where financing for the green transition and downstreaming of critical minerals increasingly relies on debt, fiscal incentives, and FDI without adequate development discipline. The global financial architecture can narrow the policy space for developing countries, including Indonesia, to independently finance the green economic transformation. Reliance on external financing risks encouraging competition to attract investment with inadequate environmental and labor standards. Under conditions of weak governance, the expansion of critical minerals could trigger a new style of extractivism, where Indonesia, especially producing regions and affected communities, bears a large portion of the socio-ecological costs, while strategic added value, technology, and control of the supply chain remain concentrated in actors with stronger bargaining positions. A downstreaming model that only pursues investment, exports, and smelter capacity does not adequately address the principles of a Just Energy Transition, especially if it ignores the rights of indigenous peoples, worker protection, occupational safety, environmental restoration, and equitable benefit sharing for producing regions.
Therefore, what is needed is not a halt to the downstreaming agenda, but rather disciplined direction and governance of downstreaming. Critical mineral downstreaming must shift from mere mining and smelter expansion to industrial deepening, strengthening domestic companies, creating decent jobs, local procurement, technology transfer, decarbonizing production processes, and equitable sharing of fiscal benefits for producing regions. Thus, downstreaming can become an instrument of economic sovereignty and green industrialization, not simply an extension of extractivism in the guise of an energy transition.
On the fiscal side, the 2026 State Budget allocation contains constitutional issues that are currently being tested in the Constitutional Court. INFID supports the judicial review of Law No. 17 of 2025 concerning the 2026 State Budget (Case No. 40, 52, and 55/PUU-XXIV/2026, Constitutional Court) because Rp 223,5 trillion of the National Nutrition Agency budget, equivalent to almost a third of the total education budget, is recorded in the education post to finance MBG, which is not legally an education cost, violating Article 31 paragraph (4) of the 1945 Constitution.
Meanwhile, the country's fiscal space is shrinking from multiple directions simultaneously. PWYP Indonesia asserts that behind the Rp 236,6 trillion in natural resource non-tax revenues (PNBP) in the 2026 State Budget (APBN) lies an acute fiscal-ecological paradox that has not been structurally resolved. This revenue figure is a false illusion because it is calculated solely from incoming cash, without ever internalizing the costs of ecological damage, the loss of living space for indigenous communities, and the destruction of public health. As a result of this disorientation, regions exploiting nature continue to be encouraged with Revenue Sharing Fund (DBH) incentives, while regions committed to protecting forests, watersheds, and coastal areas are "punished" with minimal fiscal capacity.
This paradox is further exacerbated by the central government's policy of cutting Regional Transfers (TKD) to finance centralized programs like Free Nutritious Meals (MBG) and other sectoral programs. As a result, regions are experiencing a double whammy.: Having had their natural resources depleted and the impacts of the damage spread across administrative boundaries without fair compensation, their fiscal capacity to restore the environment and serve the people is further narrowed by central government cuts to their transfer funds. The current fiscal regime has shifted the burden of environmental restoration and post-mining costs ontoexit cost) becomes the responsibility of the regional budget, while strengthening the extractive model that widens regional inequality.
The transfer of the entire Rp308 trillion budget efficiency to BPI Danantara, as warned by the Sahita Institute (HINTS), risks becoming a model of state capital accumulation with minimal public accountability if it is not accompanied by a clear development mandate, portfolio transparency, independent audits, DPR oversight, public benefit testing, and a prohibition on conflicts of interest. This risk is increasingly significant given the planned disbursement of up to Rp500 trillion to downstream projects. Therefore, any Danantara financing for downstream projects must be subject to measurable development requirements, including decent job creation, technology transfer, deepening of the domestic value chain, local procurement, decarbonization of production processes, protection of affected communities, and equitable benefit sharing for the people and producing regions.
These fiscal consequences are exacerbated by already significant regional disparities. Cuts to regional transfers, which serve as the foundation for regional liquidity to help finance Danantara and other priority government programs, have clearly further depleted regional liquidity. Worse still, these strategic programs have yet to see any significant impact on the regional economy. This is why the 34,3% cut in infrastructure and regional transfers has the potential to exacerbate the already significant disparity in public services between regions, with growth in Maluku and Papua reaching only 1,44% compared to 5,30% in Java (BPS, 2026).
JOINT CALL
- Restore the 20% allocation of the state budget solely for education, in accordance with the constitution; strictly separate MBG funding from the education budget. This revision must be completed before the 2027 Draft State Budget is discussed in the House of Representatives (DPR).
- Implement a wealth tax (wealth tax) progressive for the super-rich and fair expansion of the tax base towards a tax ratio equivalent to the ASEAN average (13% to 15% of GDP), as a concrete redistribution instrument.
- Enforce full transparency and public accountability for BPI Danantara: The Indonesian House of Representatives must summon the BPI Danantara Board of Directors for an open hearing within 60 days, regular independent audits, transparency of financial reports, and a prohibition on conflicts of interest.
- Expand and strengthen social protection for 142 million groups aspiring middle class and 60% of informal workers; stop budget cuts that impact basic public services; expand BPJS Employment coverage to the informal sector and implement a productivity-based sectoral minimum wage.
- Reform the fiscal architecture and natural resource governance to ensure that downstreaming of critical minerals does not replicate legacy extractivism, but instead generates genuine industrial value-added, decent work, regional fiscal benefits, socio-ecological protection, and national capability. This includes:
- Re-pricing and Earmarking: Recalculate royalties, taxes, and levies in the extractive sector to better reflect the true ecological and social costs, in line with the polluter pays principle. A portion of natural resource revenues should be transparently earmarked for environmental restoration, protection of affected communities, strengthening public services in producing regions, and building post-mining economic capacity.
- Intergenerational Funds & EITI Transparency: Establish a stabilization fund and an intergenerational fund for natural resources to ensure revenue from non-renewable resources remains a recurring source of income. All allocations of BPI Danantara to the downstream and extractive sectors must comply with EITI transparency standards, including contract disclosure, final beneficiaries, revenue-sharing schemes for producing regions, fiscal risks, and public return indicators such as decent work, local procurement, technology transfer, and domestic industrial development.
- Just Energy Transition: Ensure that all critical mineral downstream projects and National Strategic Projects are subject to meaningful consent from affected communities, protection of indigenous peoples' rights, occupational safety and health standards, effective grievance mechanisms, environmental restoration, and strict sanctions for projects that encroach on living space or violate the rights of residents and workers. Transitional mineral mining must not replicate traditional extractive patterns that shift socio-ecological costs to local communities.
Signed by:
International NGO Forum on Indonesian Development (INFID), Publish What You Pay (PWYP) Indonesia | The PRAKARSA | Sahita Institute – HINTS | Institute for Development Economics and Finance (INDEF).