Jakarta. The government’s efforts to reduce domestic airfares may face setbacks due to an impending increase in value-added tax (VAT), which is expected to raise prices across various goods and services, including airline tickets.

Economist Wijayanto Samirin from Paramadina University warned on Monday that the VAT increase, set to rise from 11 percent to 12 percent on January 1, 2025, would particularly affect high-end products like airfares.

Although the government has aimed to lower airfares in time for the year-end travel season, Wijayanto argued that the VAT hike would push prices up, making efforts to cut fares less effective. He advised against forcing airlines to reduce ticket prices, citing concerns over market disruption and inefficiencies.

"Forcing prices down without addressing the factors driving those costs could create imbalances in the market," Wijayanto said Monday during a discussion hosted by the Institute for Development of Economics and Finance (Indef).

He suggested that the impact of the VAT increase could be mitigated if the government reduces other costs, such as fuel prices and airport handling fees, to help airlines keep fares affordable.

"If [national flag carrier] Garuda, which is already financially troubled, is pressured to cut fares, it could lead to further market disruption and economic losses," Wijayanto added.

M. Rizal Taufikurahman, Head of Indef’s Center for Macroeconomics and Finance, echoed Wijayanto’s concerns, predicting higher airfare prices in 2025 due to the VAT hike. Taufikurahman also highlighted the potential economic strain if airlines are forced to lower fares while their operating costs increase.

"If the government imposes price cuts, the market’s response will be limited. Public spending on tourism remains weak, as there has been no significant rise in income, except perhaps during the Eid holidays," Taufikurahman said.

Meanwhile, President Prabowo Subianto has announced plans to reduce domestic airfares by around 10 percent before the Christmas and New Year holidays, aiming to ease the financial burden on travelers and stimulate the economy.

Chief Infrastructure Minister Agus Harimurti Yudhoyono said last week that the price reduction would be achieved by addressing cost components such as airport service fees, aviation fuel, and surcharges. The initiative will apply to flights from 19 major airports across Indonesia, including Soekarno-Hatta in Jakarta and Ngurah Rai in Bali.

"By tackling various cost elements, we estimate airfares will drop by around 10 percent nationwide, which we hope will help citizens during the holiday season," Yudhoyono said in a press briefing at the Presidential Palace on Nov. 26.

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