Reducing Fuel Subsidies and the Implication on Fiscal Balance and Poverty in Indonesia: A Simulation Analysis
AbstractAn 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.
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Bibliographic InfoPaper provided by Faculty of Economics, University of Indonesia in its series Working Papers in Economics and Business with number 201206.
Length: 24 pages
Date of creation: May 2012
Date of revision: May 2012
fuel subsidies; fiscal balance; poverty; Indonesia; energy policy;
Other versions of this item:
- Dartanto, Teguh, 2013. "Reducing fuel subsidies and the implication on fiscal balance and poverty in Indonesia: A simulation analysis," Energy Policy, Elsevier, vol. 58(C), pages 117-134.
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
- I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
- Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
- Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-11-11 (All new papers)
- NEP-CMP-2012-11-11 (Computational Economics)
- NEP-DEV-2012-11-11 (Development)
- NEP-ENE-2012-11-11 (Energy Economics)
- NEP-SEA-2012-11-11 (South East Asia)
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