Economist Predicts 4.1% Inflation Surge Following VAT Increase

1 month ago 27

December 23, 2024 | 11:43 am

Civil groups staged a protest demanding the government cancel the increase in Value Added Tax (VAT) to 12% which will take effect on January 1, 2025, in front of the State Palace, Jakarta, December 19, 2024. TEMPO/Imam Sukamto

TEMPO.CO, Jakarta - Bhima Yudhistira, Executive Director of the Center of Economic and Law Studies (Celios), has disputed the government's assessment of the impact of the upcoming VAT increase from 11% to 12%. While the government anticipates a minimal impact on inflation, with estimates ranging from 0.2% to 1.8%, Celios predicts a significantly higher inflation rate of 4.1%.

“This VAT is imposed in layers, from producers to distributors, so VAT is imposed multiple times up to the final consumer level. So, the final price increase is not simply a direct reflection of the VAT increase,” Bhima told Tempo on Sunday, December 22, 2024.

Bhima's analysis considers several factors, including the increase in the cost of goods sold (HPP) due to the layered impact of the VAT hike and the rising costs of fuel oil (BBM), a critical component in the distribution of goods.

Furthermore, he emphasized that rising production costs, coupled with market expectations of price increases and the weakening of the rupiah, will significantly contribute to increased selling prices. “So the projection of [inflation hike is] 4.1 percent,” said Bhima.

These findings sharply contrast with the government's projections. Febrio Kacaribu, Head of the Fiscal Policy Agency at the Ministry of Finance, expects inflation to increase by only 0.2% to 1.8% due to the VAT increase.

“Current inflation is low at 1.6 percent. The impact of the increase in VAT to 12 percent is 0.2 percent. Inflation will remain low according to the 2025 State Budget target of 1.5 percent to 3.5 percent,” said Febrio in his written statement on Saturday, December 21, 2024.

Similarly, Ferry Irawan, Deputy for Coordination of Management and Development of State-Owned Enterprises at the Coordinating Ministry for Economic Affairs, predicted a modest 0.3% inflation increase due to the VAT hike. “It's minimal, relatively small,” Ferry said at the office of the Coordinating Ministry for Economic Affairs, Jakarta, Tuesday, December 17, 2024.

Dwi Astuti, Director of Counseling, Services, and Public Relations at the Directorate General of Taxes, also downplayed the impact of the VAT increase, stating that it would only result in a 0.9% price increase for consumers.

Ilona Estherina contributed to the writing of this article.

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