Indonesia's Shrinking Middle Class Puts Growth and Economic Security Under Strain

Nine Million Fewer People in the Middle Class

Indonesia's economy grew by 5.12 percent in the second quarter of 2025, according to the Central Statistics Agency. Yet a central part of Southeast Asia's largest economy has been moving in the opposite direction: the number of people classified as middle class fell from more than 57 million in 2019 to just under 48 million in 2024.

That decline of roughly nine million people exposes a problem beneath the headline growth figure. Families that once had room to spend beyond basic needs are struggling with insecure employment, slow wage growth and rising bills for education and healthcare. Their reduced spending affects shops, restaurants, factories and the government's ambitions for faster growth.

Household consumption accounts for more than half of Indonesia's gross domestic product, or GDP, the value of goods and services produced in the economy. Consumption grew by just under 5 percent, below its pace before the pandemic. For a country so dependent on spending at home, the financial health of ordinary households is central to its economic prospects.

As of August 20, 2025, President Prabowo Subianto's administration faces two connected challenges: protecting families from further financial setbacks and creating enough secure, adequately paid jobs to rebuild the middle class. Assistance for the poorest Indonesians has provided a cushion, but many households above the eligibility limits have had to absorb mounting costs largely on their own.

Who Counts as Middle Class?

The World Bank typically describes the middle class in terms of economic security: people who can meet their basic needs and spend on other things without constantly facing the risk of poverty. Indonesia's government classifies middle class households as those spending between $132 and $643 a month.

These households account for nearly 40 percent of private spending. Their purchases support small businesses and local economies, while their taxes help finance public services. They also borrow, save and invest, providing business for the financial system.

Middle class families pay substantial education and healthcare costs themselves, reducing pressure on public services. Their financial security also supports social cohesion and political moderation. When their position weakens, the effects extend beyond the loss of an occasional restaurant meal or a postponed car purchase.

Indonesia's recent trajectory can be traced through several milestones:

• 2018: Informal employment accounted for 57 percent of jobs.
• 2019: More than 57 million Indonesians were classified as middle class.
• 2023: Informal employment had risen to 59 percent.
• 2024: The middle class numbered just under 48 million, while car sales fell by 14 percent.
• Second quarter of 2025: GDP grew by 5.12 percent, according to the Central Statistics Agency.
• 2029: Prabowo aims to achieve annual economic growth of 8 percent.
• 2045: Indonesia aspires to become a country with high incomes.

The employment figures show a shift of two percentage points toward informal work between 2018 and 2023. Such work generally offers lower wages and fewer benefits than formal employment, making it harder for families to maintain a secure standard of living.

How the Pandemic Changed Family Finances

COVID-19 dealt a severe blow to formal employment. Factories closed, businesses reduced their operations and millions of people lost stable jobs. Many turned to informal work because new formal opportunities were scarce. Most jobs created in recent years have been informal, contributing to weaker purchasing power.

Rahmat Hidayat, formerly a shoe factory worker in West Java, now sells grilled meatballs on the street. He earns less than half his previous income and can no longer afford essential healthcare for his family. His experience shows how losing a formal job can change both daily spending and access to basic services.

Halimah Nasution and her husband experienced a different route into financial hardship in North Sumatra. They had been comfortable business owners, but restrictions on social gatherings during the pandemic brought down their event supply business. They lost everything and have struggled to recover their previous living standards, having received little government assistance during the crisis.

For these families, the damage extends beyond a lower income. Education and healthcare become harder to afford, savings provide less reassurance, and uncertainty about the future grows. Government policies focused on the very poor or the very rich can leave households between those groups feeling overlooked.

Wages Struggle to Keep Up With Essential Bills

Inflation of around 2.37 percent suggests that prices across the economy are rising at a manageable pace. Education and healthcare costs, however, have been increasing much faster than wages, putting particular pressure on families that pay for these services.

Average formal sector salaries have increased by just 3.8 percent, leaving workers with little real income growth. Real income means what earnings can buy after allowing for price increases. Even when a salary rises, a household can feel little better off if essential bills absorb the increase.

Middle class families are consequently devoting more of their budgets to food and other necessities. Less remains for discretionary purchases, meaning things they can delay or do without. The shift points to both financial stress and declining wellbeing.

Recent surveys also show widespread anxiety among middle class Indonesians, particularly those with higher education. Respondents report stagnant or reduced household incomes, lower savings and weaker purchasing power. Spending a larger share of income on necessities leaves less protection against the next setback.

Tax Changes Add Uncertainty

The government's attempt to increase value added tax, or VAT, from 11 percent to 12 percent was abruptly revised so that the increase applied only to luxury goods. VAT is a tax charged on purchases, making changes to its rate relevant to both household budgets and business decisions.

The revision spared households with lower incomes from the immediate effects of a wider increase. It also created uncertainty for businesses and investors and did little to resolve the broader imbalance facing the middle class.

Indonesia's tax revenue as a share of GDP remains low compared with regional peers. That limits the government's capacity to fund infrastructure, education and social protection, all of which matter to families trying to improve their economic position.

The policy challenge is therefore connected on both sides of the household budget. Families need relief from rising costs, while the state needs sufficient revenue to provide useful services. Proposals for comprehensive tax reform seek to broaden the tax base and improve compliance, meaning more of the taxes owed would actually be collected.

Why Investment Has Not Delivered Enough Secure Jobs

Indonesia has long depended on commodities such as nickel, coal and palm oil. These industries attract investment, but they have not produced enough well paid formal jobs to sustain an expanding middle class.

The country's limited focus on manufacturing has also constrained its ability to compete with Vietnam and Malaysia, which have developed strong industries producing goods for export. Indonesia has struggled to take full advantage of changes in where companies locate production and investment.

Trade wars, conflict in the Middle East and volatile energy prices add uncertainty. Foreign investors remain interested in Indonesia's market, but a large, prosperous consumer base is part of that attraction. A weakening middle class could make the country less appealing as an investment destination.

Chatib Basri, a former finance minister and government adviser, has called for job creation through foreign direct investment, particularly in industries producing for export. He argued that welfare support needs to be accompanied by changes in employment and competitiveness:

Simply offering welfare measures will not be enough," he said. "We need to create more formal, well-paid jobs and improve the competitiveness of our economy.

Formal employment matters because a reliable wage and employment benefits give households a stronger basis for spending, saving and planning. The shortage of such jobs connects Indonesia's industrial choices directly to the financial insecurity felt by families.

Weaker Spending Reaches Shops and Restaurants

Indonesia's changing consumption patterns are already affecting businesses. Consumer spending has slowed, deflation has been observed in recent months, and major retailers have struggled to meet sales targets. Deflation means that prices fall rather than rise.

Car sales declined by 14 percent in 2024. Fast food businesses have also faced weaker demand: Pizza Hut Indonesia has closed stores and reduced staffing as customers become more cautious about spending.

Boy Lukito, chief executive of Sarimelati Kencana, which operates Pizza Hut Indonesia, described the change in household behaviour:

"Indonesians are becoming more frugal amid economic uncertainty," he said.

Businesses have responded with promotions and a wider range of products and services. Their underlying problem remains the same: middle class customers are prioritising savings and essential needs over purchases they can postpone.

Prabowo has set a goal of 8 percent annual GDP growth by 2029 and the creation of 19 million new jobs. Slower consumption makes those ambitions harder to achieve. A stronger manufacturing sector and more formal jobs with adequate pay would help address the employment problems holding households back.

What Government Support Reaches Families?

Government assistance has primarily focused on reducing poverty through cash transfers and welfare programmes for the poorest Indonesians. Those efforts have lowered poverty rates, but households earning too much to qualify can still lack the financial room to manage rising costs.

Public spending contracted by as much as 14 percent in the first half of 2025. Reduced spending limits the wider boost that government purchases and projects can give to employment and economic recovery. Money spent on a project can become wages and business income, which then supports other spending.

Prabowo's administration has promised to continue infrastructure investment and welfare transfers for the poor. Its plans also include a $28 billion programme providing free meals for children and expectant mothers, alongside plans to build 3 million homes to create jobs and support people seeking to enter the middle class.

Economists have argued that these measures, though helpful, do not fully address the pressures specific to middle class households. Proposed responses include:

• Temporary tax breaks or deductions for education and healthcare expenses.
• Targeted energy subsidies or cash assistance for households with middle incomes.
• Subsidised skills training and stronger protection against job losses.
• Investment in industries that employ many people and respond to consumer demand.
• Tax reform that broadens the base and improves compliance.

These proposals address different needs. Help with bills could reduce immediate pressure, while training and industrial investment aim to improve earning power. A lasting recovery in household security depends on both the costs families face and the jobs available to them.

Which Industries Could Support a Recovery?

Agriculture, food processing, textiles, construction, tourism and information technology have the potential to create millions of jobs and strengthen domestic demand. Industries that require many workers can spread employment gains widely when there is sufficient demand for what they produce.

Agriculture, forestry and fishing employed more than 28 percent of Indonesians aged 15 and above in 2024. Manufacturing contributed more than 18 percent of GDP and employed nearly 14 percent of the workforce. Those figures show the scale of the sectors involved in efforts to improve employment and household incomes.

Jakarta's provincial government has piloted programmes intended to connect activities that employ large numbers of people. They include free nutritious meals, cooperative savings and microfinance for smallholder farmers. The initiatives aim to stabilise food prices, strengthen demand and help vulnerable groups move into the middle class.

Investment in food processing, textile manufacturing and construction could generate jobs, add value to production and improve living standards across regions. Adding value means turning an input into a product worth more, such as processing agricultural produce rather than selling it without further preparation.

Technology offers another route. With nearly all Indonesians accessing the internet through mobile phones, digital entrepreneurship and workforce training have considerable potential. Software development, information technology support and digital content creation are among the possible areas for employment.

The World Bank cautions, however, that relying too heavily on sectors built around low wages and large workforces can leave economic progress stagnant and limit skills development. Indonesia also needs skilled jobs of good quality, investment in education and innovation to remain competitive internationally.

Connections between industries could help broaden opportunities. Integrating agriculture with tourism or using technology in construction are examples of cooperation that could make businesses more resilient and support lasting growth. The challenge is to create employment now while improving the skills and productivity that can support better earnings later.

Economic Anxiety Enters Public Debate

Student demonstrations under the #IndonesiaGelap banner, meaning Dark Indonesia, have brought concerns about education costs and economic prospects into public view. Initially sparked by proposed tuition increases and scholarship cuts, the protests expanded to demands for better governance, employment opportunities and social protection.

Many young Indonesians are also considering work or study abroad because of limited prospects at home. The #KaburAjaDulu movement, translated as "Just Flee First", reflects that frustration, alongside growing distrust in the government's ability to deliver on its promises.

Prabowo continues to enjoy high approval ratings, but dissatisfaction is more pronounced among the educated middle class. Financial pressure, reduced savings and uncertainty about employment have made economic security a political concern as well as a household one.

Unaddressed middle class anger carries risks for social and political stability, as upheavals in other countries have shown. Expanding social protection, improving public services and ensuring good governance are central to maintaining social cohesion. Indonesia's ambition to become a country with high incomes by 2045 depends in part on restoring the security and opportunities of its middle class.

Key Points

• Indonesia's middle class fell from more than 57 million people in 2019 to just under 48 million in 2024.
• GDP grew by 5.12 percent in the second quarter of 2025, while household consumption grew by just under 5 percent.
• Pandemic losses, informal employment, slow wage growth and rising essential costs have weakened household security.
• Middle class households account for nearly 40 percent of private spending, making their finances important to businesses and growth.
• Government plans include free meals and housing, while proposed reforms target household costs, skills, taxation and formal employment.
• Prabowo aims for 8 percent annual growth by 2029 and 19 million new jobs, against a backdrop of growing economic anxiety.