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Politicizing budget allocations
The more than 10 percent increase in fuel subsidies and the continued use of a fixed fuel-pricing mechanism not only would negate all the government’s commitment to a faster transition into clean and renewable energy, but also make the fiscal management highly vulnerable to the highly volatile international oil prices.
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Supply-side: A gas station worker refuels a car on a Palembang-Jambi highway section in Tanjung Kerang area, Musi Banyuasin regency, South Sumatra, on April 11. (Antara/Nova Wahyudi)
A
s President Joko “Jokowi” Widodo will soon enter the final year of his second and final tenure he does not need to resort to populist, yet imprudent, fiscal measures in the 2024 election year. He is better positioned to leave behind a good legacy in the form of vigorous reforms, though rather politically unpopular, for the long-term good of the economy and fiscal management.
Unfortunately, the government’s proposal for the 2024 state budget currently under deliberations at the House of Representatives, stipulates several major budget appropriations that smack of “populist” measures inimical to prudent fiscal management. We share the views of many analysts that the almost 15 percent increase planned in the budget for social assistance programs and over 10 percent rise in fossil fuel subsidies for 2024 seem to be “politicized” budget expenditures.
We cannot avoid such inference after observing how Jokowi has been openly campaigning in support of the candidate whom he endorsed for the Feb. 14, 2024 presidential election.
The government should have been aware that even though the economy has been restored to an annual growth of 5 percent, there will no longer be revenue windfalls from commodities such as minerals and palm oil next year. Commodity prices have been declining, though gradually, due to weaker market demand amid the global economic uncertainty and geopolitical risks.
The government claims that the objective of the much bigger social assistance of Rp 547 trillion (US$36.46 billion) is to wipe out the incidence of extreme poverty, defined by Statistics Indonesia (BPS) as persons with per capita monthly spending of less than Rp 325,000.
The objective is quite noble, but given the government’s inadequate institutional capacity to implement the social safety net program and the unreliable data and mapping of poor people, we are concerned about the risks of wider misuse and other forms of malfeasance. The Supreme Audit Agency (BPK) audit report for the 2022 budget revealed Rp 185 billion in misappropriations in the delivery of social aid.
The government has yet to integrate the different (more than 10) components of social assistance to optimize the efficiency and effectiveness of the whole program. Limited coordination and data-sharing across stakeholders has led to haphazard separation of programs that are virtually targeted to the same group of people. Separate delivery processes carried out by different implementing agencies also compromise targeting and coverage.
Only a truly integrated social protection system which is based on a single, uniform database and co-owned by all relevant ministries and agencies, will be able to address those problems.
The more than 10 percent increase in fuel subsidies and the continued use of fixed fuel-pricing mechanisms not only would negate all the government’s commitment to a faster transition into clean and renewable energy, but also make the fiscal management highly vulnerable to the highly volatile international oil prices.
We now depend on imports for about 60 percent of our fuel needs of about 1.6 million barrels a day. Fuel subsidies will decrease from Rp 551 trillion last year to a budgeted total of Rp 340 trillion this year only because of the decline in international oil prices from an average of $100/barrel in 2022 to an estimated $84 this year.
Fuel subsidies have been a reoccurring problem for the economy, weighing on the state budget, providing unjust support for fossil fuels, and slowing the much-awaited clean energy transition, including electric vehicles.
The fuel pricing mechanism, which uses a fixed-price system that subsidizes the domestic fuel price to keep it below the market price, is based on outdated premises. We have often suggested that the pricing mechanism for subsidized fuels such as Pertalite gasoline, automotive diesel and kerosene be redesigned in a way that gradually brings fuels closer to market prices but still reduces exposure to price shocks.
Jokowi would have left behind a legacy of good energy policy if he set up a clear roadmap, including short-term and medium-term measures, to gradually phase out fossil fuel subsidies, and communicate effectively about the huge wasteful spending of taxpayers’ money to explain the benefits of reform and build public support.
