Indonesia’s government needs more revenue to fund spending that can boost GDP growth, raise well-being and reduce poverty. The tax-to-GDP ratio is low relative to other emerging market economies. The difficulty is to raise revenues without denting growth or worsening inequality. Successive reforms have modernised the tax administration and increased the number of taxpayers. Nonetheless, raising compliance is an ongoing challenge. Investing in the tax administration, particularly human resources and information systems, rightly remains a government priority. This will help ease compliance costs and strengthen enforcement, raising revenue. There is also scope to improve the design of various taxes. Broadening the bases of income and consumption taxes would raise more revenue and reduce distortions. Expanding property taxation, if appropriately implemented, could provide additional funds for local governments, which have substantial responsibilities in Indonesia’s decentralised system of delivering government services. Taxes can also be used more extensively to discourage activities and behaviours with negative health and environmental externalities. Strengthening property rights and fighting illegal extraction would increase revenues from Indonesia’s natural resource wealth.

Tourism has boomed in Indonesia in recent years and is already one of the main sources of foreign-currency earnings. Indonesia has rich and diverse natural assets, whose tourism potential remains underutilised. The government has an ambitious target of attracting 20 million tourists by 2019, up from nearly 14 million in 2017. The main destination will continue to be Bali. Using Bali as the preferred development model, the government wants to develop other destinations, particularly through infrastructure programmes to improve connectivity, which is a longstanding challenge for tourism as well as for regional development more generally. Enhancing the tourism-related skills of local populations will provide them with expanded job opportunities. This calls for reforms to vocational education and training. Moreover, recent efforts by the authorities to improve the business environment need to continue, including through helping firms embrace digitalisation. Tourism may be growing too fast in some destinations without adequately taking into account sustainability issues, both for the environment and local communities. Better planning and co-ordination at all levels of government and across relevant policy areas can facilitate more sustainable tourism development.