T

he government has proposed an increase in this year’s subsidy by Rp 57 trillion (US$6.66 billion) despite a call from international financial agencies to gradually cut them in order to reduce the soaring budget deficit.

In the first discussion on the revised 2011 state budget with the House of Representatives, Finance Minister Agus Martowardojo proposed that the subsidies budget be increased to Rp 244.5 trillion from the current Rp 187.6 trillion, a 30.3 percent increase.

Much of the subsidy spending, or Rp 187.2 trillion, will go out for energy subsidies — Rp 120.8 trillion for fuel and Rp 66.4 trillion for electricity.

“There’s an implication from the increase in [Indonesia Crude Price] from US$80 per barrel to $95 per barrel and in [subsidized] fuel consumption from 38.6 million to between 38.9 million and 40.5 million kiloliters,” Agus’ presentation read.

The handout showed that the increase in the electricity subsidy due to the delay in the commercial operation date of power plants, the declining gas output and the surge in coal prices had also factored in the ballooning subsidies.

“We are spending more and more money, but little of that goes out for development,” Melchias Marcus Mekeng, chairman of the House’s budget committee, said in the meeting.

“For me, it’s just not funny. Imagine [Rp 244.5 trillion] being used to build roads. How big could those be?” he said, adding that the proposed subsidy budget accounted for roughly 30 percent of the state’s total spending.

The World Bank has also warned Indonesia about its surging subsidies, saying the money could be instead spent on pressing development needs, such as education, health, social protection and infrastructure.

The call has been echoed by many local and global economists, who suggested the soaring fuel subsidy should be converted into a direct subsidy for those in need so that the haves could buy fuel at market price, to ease strain on the state budget.

Cries of “just raise the fuel prices!” were heard over the parliament’s budget meeting, a reference to a law that allows a fuel price adjustment if the benchmark Indonesia Crude Price (ICP) is at least 10 percent higher than the price assumed in the budget.

In the first five months of this year, the ICP averaged more than $110 per barrel, 37.5 percent higher than the budget assumption.

Minister Agus referred to the possibility: “We never close the door to that alternative”. “But for now there’s no plan to increase fuel prices.”

“We believe the final decision on raising fuel prices rests with the President,” Standard Chartered economists Fauzi Ichsan and Eric Sugandi said in a recent report.

The government and House members have indefinitely postponed a plan to restrict subsidized fuel consumption for private cars that was supposed to take effect in April, citing concerns of high global oil prices and high inflation.

“Political costs implementing the scheme in the current climate may be high,” Hak Bin Chua, a Singapore-based economist at Bank of America Merrill Lynch, said in a report.

A recent survey by the Indonesian Survey Circle (LSI) showed that the President’s job approval rating had hit a new low of 47 percent from 57 percent at the time of his reelection due to his failure to get things done and the graft allegations surrounding his Democratic Party.