Halting the decline of the middle class

Jakarta –

The latest data from the Bureau of Central Statistics (BPS) shows that 9.48 million middle-class Indians have fallen out of class in the past five years. When referring to the classification of social groups based on the poverty line compiled by BPS, there are five classes, namely poor (below the poverty line), vulnerable to poverty (1 – 1.5 times the poverty line poverty), middle class applicants (1.5 -). 3, 5 times the poverty line), middle class (3.5 – 17 times the poverty line), and upper class (more than 17 times the poverty line).

The prospective middle class is the largest socio-economic group in Indonesia. In the period 2019-2024, the number increased by 8.65 million to reach 137.5 million people, or equal to 49.2% of the total population. The second largest group is the vulnerable poor group. Over the past five years, the number of people vulnerable to poverty has increased by 12.72 million people. As of 2024, the figure will reach 67.69 million, or 24.23% of the total population.

At a time when the number of the prospective middle class and vulnerability to poverty continues to increase, the population of the middle class is shrinking. During 2019-2024, middle class citizens decreased by 9.48 million people to only 47.85 million. Now, the proportion is only 17.13% of the total population, down from 21.45% five years ago. In fact, the share of the middle class is expected to reach around 70% of the total population in 2045.

LPEM FEB UI said in the report ‘Indonesia Economic Outlook 2024 for Q3 2024’ that the middle class plays a very important role in the state’s income, with a contribution of 50.7 percent of tax income. Meanwhile, middle-class candidates contributed 34.5 percent. If the purchasing power of the middle class decreases, tax contributions will decrease and could worsen the already low tax to GDP ratio.

The government is blaming Covid-19 for the decline of the middle class. However, some observers dispute this opinion. According to LPEM UI research results, a downward trend in middle class numbers has been occurring since 2018 before the outbreak of the Covid-19 pandemic that devastated the Indonesian economy.

A causal factor

There are several factors that are thought to be causing the decline of the middle class in Indonesia. First, premature deindustrialization. Deindustrialization in Indonesia refers to the phenomenon of reducing the contribution of the manufacturing industry sector to the Gross Domestic Product (GDP) and reducing the share of the workforce working in manufacturing industry sector. This is usually marked by a slowdown or decline in manufacturing activity, meaning that the sector is losing its leading role in the economy.

Second, the increase in Value Added Tax (VAT) implemented from April 2022 is believed to have contributed to the decline of the middle class in Indonesia through a number of ways that directly affect power purchasing, consumption and economic sustainability of this group. The increase in VAT increases the relatively greater tax burden on the middle class, reduces disposable income and suppresses domestic consumption, which is one of the key drivers of economic growth.

It is believed that the talk of increasing the VAT rate to 12% is increasingly hitting the middle class in Indonesia. An increase in VAT increases the overall cost of living. The middle class, which usually has fixed costs for education, health, housing and other needs, will feel more pressure to meet these needs. The new government under the leadership of Prabowo Subianto should review the proposed 12% VAT rate increase in 2025.

Third, global economic uncertainty, such as a recession, financial crisis, or pandemic, can have a significant impact on the national economy. When the economy slows down, the middle class is often one of the groups most affected because of their reliance on fixed-paying jobs and little savings. Economic crises can also result in lower incomes, job losses, and reduced opportunities to improve living standards.

Fourth, high debt burden. The middle class often relies on credit and loans to finance housing, vehicles, education and other consumption. When the economic situation worsens, interest rates increase, or income decreases, this debt burden can become a real financial burden. Relying on debt to maintain a lifestyle increases financial risk and can cause the middle class to fall into economic hardship.

Fifth, the lack of employment opportunities in the formal sector for the middle class. Many workers in the formal sector have migrated to the informal sector, especially after the Covid-19 pandemic. Then there are also many new workers who immediately enter the informal sector because of the lack of work in the formal sector. In fact, the informal sector tends to be unviable because it does not receive adequate income and does not have social security.

Government Strategy

So, what strategies can the new government implement in the future to stop the decline of the middle class? The first strategy is indeed to evaluate several policies that may threaten the decline of the middle class, such as an increase in VAT, changes to the KRL tariff scheme based on NIK, and other additional burdens such as contribution obligations of Tapera and third parties. car insurance obligations.

The second strategy is increasing access and quality of education and skills training. The government can provide more education subsidies and scholarships to the middle class to ensure wider access to quality education. UKT implementation is often a trap for the middle class, as the middle class has a higher burden.

The third strategy strengthens social safety nets and public services. A strong social safety net can help cushion the middle class weather economic uncertainty and other social risks. Expanding access to affordable health insurance and education to the middle class can reduce their financial burden. Ensure that social assistance programs not only cover poor groups but also vulnerable groups from the middle class who have economic difficulties.

The fourth strategy encourages growth in economic sectors that can absorb large numbers of middle class workers. The government can encourage the development of sectors that have a high potential for labor absorption, such as creative industries, information technology and tourism. The government can also strengthen the role of Micro, Small and Medium Enterprises (MSMEs) through better access to finance, training and markets. MSMEs are often the backbone of the middle class and need to be supported for development.

The fifth strategy is economic diversification and innovation. Economic diversification is needed to reduce dependence on certain vulnerable sectors. The government can encourage the development of new sectors such as renewable energy, sustainable agriculture and creative industries.

The decline of the middle class in Indonesia is caused by a combination of interacting economic, social and policy factors. From economic uncertainty to less supportive policies, the challenges facing the middle class require broad attention and solutions. Policies aimed at economic stability, increasing access to education, and adequate social protection are essential to support the middle class to remain stable and contribute to Indonesia’s economic growth.

Mohammad Nur Rianto Al Arif UIN Professor Syarif Hidayatullah, Secretary General of Indonesian Lecturers Association DPP

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