The President said, while briefing hundreds of alumni the National Resilience Institute (Lemhanas), that one-fourth of the state expenditures had so far gone to finance subsidies and one-fifth to pay debts, leaving only a limited budget to finance development activities.

“I want our state budget to grow healthier and stronger to finance the country’s development,” he said at the Presidential Palace.

“Thus I want incorrect subsidies to be cut. And which subsidies are they? That is another challenge.”
Indonesia’s deficit is estimated to reach Rp 98 trillion (US$10 billion), or 1.6 percent of the country’s GDP in 2010.

Under the 2010 budget bill, the government has allocated Rp 107 trillion in energy subsidies, which may increase if global oil prices rise Rp 69 trillion has been allocated for subsidized fuels and Rp 38 trillion for electricity.

With subsidy cuts commonly leading to soaring prices, Yudhoyono said it should be conducted in a “systematic way”.

“From an economic point of view, the subsidy cut might be a solution, but from social, political, and security aspects, it could create huge problems. The current policy has yet to take into account people’s purchasing power and incomes per capita.”

The President said these thoughts had led to the government’s adoption of a new subsidy policy for the next five years.

The new policy, the President explained, would ensure that subsidies given must comply with certain principles, such as having a rational basis for the amount, being correctly targeted, and consisting of several phases to prevent any social and economic turbulence.

“[The subsidy cuts] should be in line with improvements in our people’s purchasing power and welfare, as well as our inflation management.”

Subsidized commodities in Indonesia include fuel, electricity, and fertilizers. The government has set out plans to cut subsidies for these commodities gradually to prevent public rejection.

Fuel subsidy cuts, conducted twice by Yudhoyono’s administration during his first five-year tenure, led to fuel price hikes, with a knock-on effect on transportation and other prices.

The last time the government raised subsidized fuel prices was in May 2008, with an average 28.7 percent increase, as global crude oil prices reached almost $140 per barrel at that time.

The cuts prompted a nationwide outcry, with large rallies taking place in a number of regions.

Yudhoyono said, however, that the public had begun to slowly but surely understand the “bitter, difficult” decisions the government had to take in 2005 and 2008.

“This nation has finally come to realize that the subsidy cuts brought us benefits; they’ve made our economy healthy and we can use the growth to finance our education and health programs for our people, and our infrastructure development.”

Yudhoyono added that inflation trends should be taken into account before applying another subsidy cut policy.

He also said that Indonesia had been in the right direction with its economic polices, with the country among the only three members of the G20 economic forum managing to record positive growth during the global financial crisis.

The other two countries are China and India.

The government has estimated economic growth of 5.5 percent next year from an estimated 4.3 percent this year.

Inflation in 2010 is predicted to reach 5 percent as the global economy recovers.

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