Reducing Fuel Subsidies and the Implication on Fiscal Balance and Poverty in Indonesia: A Simulation Analysis

Teguh Dartanto

No 201206, Working Papers in Economics and Business from Faculty of Economics and Business, University of Indonesia

Abstract: An increase in world oil prices has forced the government of Indonesia to run a larger budget deficit to finance energy subsidies. Between 2000 and 2011, Indonesia burnt 61 per cent of oil and gas revenues to fuel and electricity subsidies. These subsidies worsen income distribution in Indonesia since almost 72 per cent of these subsidies are enjoyed by the 30 per cent of the richest income groups. Therefore, there are strong economic arguments to reallocate fuel subsidies to infrastructures, education and health sectors that can boast economic growth. Applying a CGE-Microsimulation, this study found that removing 25 per cent of fuel subsidies increases the incidence of poverty by 0.253 per cent. If this money were fully allocated to government spending, the poverty incidence would decrease by 0.270 per cent. Moreover, the 100 per cent removal of fuel subsidies and the reallocation of 50 per cent of them to government spending, transfers and other subsidies could decrease the incidence of poverty by 0.277 per cent. However, these reallocation policies might not be effective to compensate the adverse impacts of the 100 per cent removal of fuel subsidies if economic agents try to seek gain through mark-up pricing over the increase of production costs.

Keywords: fuel subsidies; fiscal balance; poverty; Indonesia; energy policy (search for similar items in EconPapers)
JEL-codes: C68 I32 Q42 Q48 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2012-05, Revised 2012-05
New Economics Papers: this item is included in nep-cmp, nep-dev, nep-ene and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Reducing fuel subsidies and the implication on fiscal balance and poverty in Indonesia: A simulation analysis (2013)
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