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

Author

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  • Teguh Dartanto

    () (Institute for Economic and Social Research, Department of Economics, Faculty of Economics, Universitas 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.

Suggested Citation

  • Teguh Dartanto, 2012. "Reducing Fuel Subsidies and the Implication on Fiscal Balance and Poverty in Indonesia: A Simulation Analysis," Working Papers in Economics and Business 201206, Faculty of Economics and Business, University of Indonesia, revised May 2012.
  • Handle: RePEc:lpe:wpecbs:201206
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    References listed on IDEAS

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    More about this item

    Keywords

    fuel subsidies; fiscal balance; poverty; Indonesia; energy policy;

    JEL classification:

    • 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

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