Fiscal policy is the government’s policy in managing state expenditures and revenues through taxation and public spending, and it has a significant impact on the business sector. Its influence can be either direct or indirect, depending on the form and direction of the policies implemented.
Overall, fiscal policy is an important tool in creating either a conducive or challenging business climate. Therefore, the business sector needs to closely monitor the direction of government policy as part of its strategy and planning.
To gain a deeper understanding of how fiscal policy affects the business sector, here is a complete review you can explore!
What Is Fiscal Policy?
Fiscal policy was first introduced by John Maynard Keynes, and became widely adopted globally following the Great Depression after World War I in 1929. According to Keynes, the government has the right—and obligation—to manage national income and expenditure by setting taxes and creating policies to support macroeconomic stability.
In his view, government intervention in macroeconomic matters is essential to ensure stability, growth, and public welfare. Consequently, many modern countries, including Indonesia, adopt Keynesian approaches in formulating their state budgets and fiscal policies.
In definition, fiscal policy refers to a government’s actions aimed at stabilizing income and expenditures to ensure the economy grows in line with national objectives. According to Indonesia’s Financial Services Authority (OJK), fiscal policy encompasses decisions about taxation, revenues, public debt, and government spending to achieve specific economic goals.
Pro-investment fiscal policies, such as tax incentives or public spending in strategic sectors, lead to the creation of new jobs. When the government increases spending on infrastructure or encourages investment in the private sector, new employment opportunities emerge across various industries, from construction to technology. This has a direct impact on society by increasing household income and reducing unemployment rates.
With more people employed, their incomes rise, which in turn boosts consumer purchasing power. Higher consumption drives overall economic growth, as companies respond to increased demand by expanding production and hiring more workers. This creates a positive cycle in which employment and investment mutually reinforce long-term economic growth.
Discover More : The Role of GDP in Assessing Economic Performance
Tax and Government Spending Impacts on Business
Taxation is one of the key components of fiscal policy. When the government increases tax rates—whether income tax, value-added tax (VAT), or corporate tax—the cost burden on businesses rises. As a result, profit margins shrink, potentially hampering plans for expansion or innovation. Businesses may also need to adjust their prices, which in turn can reduce consumer purchasing power.
On the other hand, when the government lowers taxes or provides tax incentives—such as reduced rates for MSMEs or tax holidays for new investors—businesses benefit from improved liquidity. This allows them to allocate more resources toward business development, human capital, and product innovation.
Government spending also plays a key role. In certain conditions, increased public spending—such as on infrastructure, social assistance, or subsidies to strategic sectors—can significantly stimulate the economy. For businesses, this presents opportunities: infrastructure projects generate employment, improve logistics, and open access to new markets.
Government spending that increases consumer purchasing power—such as energy subsidies or direct cash assistance—can also indirectly drive demand for goods and services.
Not all fiscal policy impacts are direct. Some effects occur indirectly, such as through changes in consumer behavior. For example, a hike in consumption tax may reduce overall demand, even if businesses aren’t taxed directly. Conversely, increased social spending can boost demand in essential goods and services sectors, encouraging growth in trade and services.
Overall, fiscal policy is a major external factor influencing business sustainability and growth. Entrepreneurs should closely track fiscal developments, both at national and regional levels. Quick responses and adaptive strategies are essential for businesses to remain resilient amid changing fiscal landscapes.
Strategies to Optimize Fiscal Policy
To not only survive but thrive amid ongoing fiscal changes, businesses must adopt proactive and adaptive strategies. Government policies—whether tax-related, spending-based, or structural—can either support or challenge business operations. Below are several strategies that businesses can apply:
1. Utilize Tax Incentives and Facilities
Indonesia’s government regularly provides a range of fiscal incentives, including reduced income tax (PPh), import tax exemptions, and tax holidays or allowances for certain industries. A prime example is the Super Deduction Tax, offering up to 300% tax deduction for R&D activities or vocational training (as regulated under Government Regulation No. 45 of 2019).
However, many small and medium enterprises (SMEs) have not fully utilized these benefits due to limited knowledge or access. Therefore, it is crucial for business owners to regularly consult tax professionals or attend official briefings from tax authorities.
2. Align Business Plans with Government Spending
Government spending is a major driver of private sector growth. When public investment increases in infrastructure, green energy, public digitalization, or food security programs, supporting industries see a surge in demand.
Companies that anticipate and adapt to government spending priorities can offer timely solutions or products. For example, logistics firms may expand their routes in areas with new road networks.
Here is a chart showing the growth of the Transportation and Warehousing (logistics) sector in Indonesia from 2020 to 2022. A significant increase of 19.87% is clearly seen in 2022, driven by infrastructure development such as toll roads and new ports (Data from BPS and the Ministry of Transportation).
3. Prepare Responsive Budgets
Changes in fiscal policy are often beyond business control, but their impact can be managed. Companies need to maintain flexible budgets—for example, contingency plans for tax hikes, or strategies to capitalize on tax relief opportunities. This ensures that investment or expansion decisions remain measured and sustainable.
As a best practice, some companies allocate a portion of annual profits into contingency funds to anticipate potential increases in income or value-added taxes.
4. Strengthen Industry Networks and Associations
Being active in business associations provides access to up-to-date policy information and a channel to advocate for pro-business fiscal measures. These forums also enable companies to share best practices and build a collective voice.
In Indonesia, policies such as import-export tax relaxation or green financing incentives often arise from lobbying by associations such as APINDO and KADIN during the post-pandemic recovery.
5. Integrate Technology into Financial and Tax Systems
Adopting technology—such as digital accounting systems, online tax filing, or financial analytics dashboards—helps ensure fiscal compliance while boosting operational efficiency. These systems reduce manual errors and help businesses identify opportunities for tax optimization and cost reduction.
By implementing these strategies, businesses can turn fiscal policy from a potential threat into a strategic advantage. Especially in a post-pandemic and digitally transforming economy, a fast and intelligent response to policy shifts is key to business continuity.
Understanding and leveraging fiscal policy is not just about compliance—it’s a fundamental part of long-term business strategy. However, translating regulations into practical action requires deep understanding and the right approach.
Arghajata Consulting is here to support businesses like yours in crafting efficient fiscal strategies, optimizing tax incentives, and ensuring compliance with evolving regulations. Backed by a team of seasoned experts and a sector-specific approach, we are ready to become your trusted partner for sustainable business growth.
