Subsidy may go 60% over budget

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A car passes by a banner put up by the government in Depok, Bogor, on Tuesday to raise awareness among wealthy people to use unsubsidized fuel. The poster reads “Still use subsidized fuel? Shame on you!” (JP/P.J. Leo)

State budget realization in the first half of this year is telling the same old tale of slow disbursement, but the amount of money spent on subsidies is alarming, forcing the government to set aside Rp 79.4 trillion (US$8.5 billion) in extra spending for the fuel subsidy.

The government spent Rp 88.9 trillion on the fuel subsidy in the first six months, or 64.7 percent of the overall Rp 137.4 trillion budget for the whole year, according to Finance Ministry data. But it has
estimated it will spend Rp 127.9 trillion more in the second half, boosting the fuel subsidy up to Rp 216.8 trillion, 57.8 percent more than the initial allocation.

“This is mainly due to an increase in energy subsidy costs,” according to ministry data distributed in a hearing with the House of Representatives’ budget committee on Tuesday.

The ministry attributed a higher benchmark Indonesia Crude Price (ICP) and weakening rupiah exchange rate, as well as slow progress in power plant development and weak gas supply, as the primary reasons for the soaring fuel subsidy.

A higher fuel subsidy, which is enjoyed more by the haves rather than the have-nots, would push the state budget into further deficit.

Finance Minister Agus Martowardojo said the deficit would reach between 2.3 and 2.5 percent by the end of this year, nearing the legal threshold of 3 percent of Indonesia’s gross domestic product (GDP). The deficit was at 0.91 percent in the first semester.

Meanwhile, the hundreds of trillion of rupiah spent on the subsidy could instead be used for development and social spending to build roads, ports and power plants to provide electricity to the entire population, or for subsidies to the poor, economists have said.

“Fiscally, the huge fuel subsidy is not healthy. But we must admit that this is what’s been supporting political stability. So, the poor fiscal performance is an incentive for political stability. This is the paradox of Indonesia’s political economy,” said A. Tony Prasetiantono, an economist from Gadjah Mada University.

The House in April rejected a government proposal to cut the subsidy by increasing fuel prices by 30 percent to Rp 6,000 per liter, except if oil prices reached a certain threshold.

“Economically, the composition [of the state budget] is very far from ideal. State budget expenditure should be able to spur economic growth, by spending more on capital expenditure. This would have a multiplier effect and create jobs,” Tony said.

The government allocated Rp 168.7 trillion for capital spending this year, of which only 18.2 percent, or Rp 30.6 trillion, was spent from January to June this year.

Overall, in the first half of this year, central government spending reached 36.8 percent of the entire year’s Rp 1,069.5 trillion state budget allocation, or Rp 393.9 trillion. Government spending in Indonesia has been typically remains through the year low until a sudden acceleration toward the year-end.

State revenue, on the other hand, has reached 43.7 percent of full-year target of Rp 1,358.2 trillion, or Rp 593.3 trillion in the first six months of this year, as rapidly growing economic activities in Indonesia boosted tax collection, while higher tobacco excise and rising overall imports translated into more duties.

The finance minister said that total tax revenues collected during the first semester accounted for 44.9 percent of the target of Rp 1,016 trillion stated in the revised 2012 state budget.

“Although the tax receipts were still less than 50 percent of the total target, they were good enough. We hope tax and excise revenues will slightly exceed the target this year,” Agus said.

Despite the slow growth in exports, the finance minister said he was optimistic that GDP would grow at between 6.3 and 6.5 percent.