A Two-Pronged Crisis: Unraveling the Tangled Web of Layoffs and Domestic Fiscal Pressures

  

A country’s economic policies are, in essence, a reflection of the government’s commitment to the welfare of its people. However, Indonesia’s current macroeconomic dynamics reveal a troubling contradiction. On one hand, the public faces the threat of income loss due to a wave of layoffs that shows no signs of abating across various industrial sectors. On the other hand, the public’s remaining financial leeway is being increasingly squeezed by aggressive fiscal policies aimed at meeting government revenue targets. This phenomenon has sparked a structural debate regarding the effectiveness and long-term impact of a regulatory framework that is perceived as insensitive to the real purchasing power of economically vulnerable groups.

n   Weakening Manufacturing Sector and Rising Layoff Rates

Based on data compiled by the Ministry of Manpower (Kemnaker) and periodic reports from trusted media outlets such as Tempo.co and Detik.com, the number of workers forced to lose their jobs continues to rise significantly. This wave of layoffs is no longer a seasonal phenomenon but rather a structural lagging indicator of economic slowdown. Labor-intensive industrial sectors, such as textiles, apparel, and footwear, have been the hardest hit. Major industrial hubs—from West Java and Banten to Central Java—continue to account for the largest share of national employment statistics.

External factors such as the global economic slowdown and international geopolitical tensions have indeed contributed to the decline in the volume of Indonesia’s manufactured goods exports. However, domestic issues are no less critical. Soaring domestic operating costs, the flood of illegal imported products into the local market, and the failure of business incentives to function optimally have forced many corporate management teams to take extreme efficiency measures. The reduction in overtime hours and the curtailment of employment contracts that occurred several months earlier have now escalated into a wave of open, mass layoffs.

n   Fiscal Pressure Through VAT and Ambivalence in Government  Incentives

Amid these fragile labor market conditions, the government has instead taken bold steps to safeguard the health of the state budget. The phased implementation of value-added tax (VAT) rate increases—including adjustments that have been in effect since the Tax Regulation Harmonization Act (UU HPP) was enacted—places an additional direct burden on end consumers. VAT is regressive; that is, the amount of this tax relative to income takes up a much larger share for low-income and middle-class people than for the wealthy elite.

The government argues that a number of basic necessities, such as rice, eggs, and meat, as well as essential services like education and healthcare, are exempt from VAT to protect low-income communities. Temporary economic stimulus packages—such as VAT subsidies for the affordable housing sector, limited-scale electricity rate discounts, and government-funded income tax (PPh Article 21) incentives—have also been rolled out.

However, a report by an economic analyst on Kompas.com indicates that the effectiveness of this social safety net is still far from adequate. VAT increases in the logistics sector, on unsubsidized fuel, retail goods, and the secondary industry supply chain continue to trigger a domino effect that raises the prices of basic necessities in general, which ultimately erodes the public’s real purchasing power.

n   Systemic Impacts on Household Purchasing Power and Consumption

Household consumption has long been the main driver of Indonesia’s economic growth, contributing more than 50 percent to gross domestic product (GDP). As the middle class—which does not receive cash social assistance from the government but is not wealthy enough to be immune to inflation—is squeezed by fears of layoffs and price spikes caused by taxes, they respond by tightening their spending. The retail sector and micro, small, and medium-sized enterprises (MSMEs) were the first to feel the slump in market demand. This decline in retail sales volume ultimately triggered a vicious cycle: sales fell, factory profitability plummeted, and the possibility of further layoffs reemerged as companies sought to maintain their operations.

n   Fiscal Governance Reform and Crisis Mitigation Strategies

To break this vicious cycle, the government can no longer rely solely on a rigid, one-dimensional approach focused solely on meeting tax revenue targets. Aggressive fiscal policies must be radically balanced with efficiency in government spending and a more equitable expansion of the tax base—such as optimizing a wealth tax on the ultra-wealthy—rather than continuing to expand levies on commodities consumed by the general public. The government-formed Layoff Task Force (Satgas PHK) needs to be equipped with concrete policy instruments capable of alleviating the structural burdens on the business sector. Incentives in the form of reduced corporate income tax rates for labor-intensive industries that commit to avoiding layoffs should be seriously considered.

On the other hand, accountability and transparency in the use of public funds are absolute prerequisites for restoring public trust. The people will not object to paying taxes if they see those funds returned in the form of quality public services, infrastructure that supports the economic mobility of the lower classes, and a responsive social safety net when employment crises strike. Conversely, if the national budget continues to be spent on vanity projects driven by the political interests of the elite and prone to corruption, then the austerity measures forced upon the people will only create a ticking time bomb of social unrest that threatens national stability. *