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JAKARTA
POST, 10 Mei 2013
The government is
now facing a big problem with the increasing fuel subsidy. In 2013, the fuel
subsidy was almost Rp 194 trillion (US$19.9 billion) or about 11.5 percent of
the state budget.
Although the government always sets the fuel subsidy in the state budget, fuel consumption has exceeded the benchmark in the last few years. In 2012, for example, subsidized fuel consumption exceeded 45 million kiloliters, well over the target of 40 million kiloliters.
Higher fuel consumption is the obvious result of more vehicles on the roads. In 2010-2011, for example, 8.7 million additional vehicles took to the streets.
The fuel subsidy is important mainly to keep the price goods and services stable. If the price of goods and services increases, inflation goes up, purchasing power goes down and the poverty rate increases.
The result of the fuel price increase in 2005 was that the poverty rate went up from 15.4 percent to 17.8 percent.
A fuel price increase is not the only factor that drags the poverty rate up. The absence of social protection programs can cause the poverty rate to increase. In fact, while the fuel subsidy continuously increases, the budget for social protection programs will always shrink, and this in turn will cause the poverty rate to go up.
When the increase in fuel subsidy knocks on to social protection programs, it will distort economic growth and job creation. Low social protection breeds low capability, making the low-income group less able to contribute to the economy.
Simply shifting the fuel subsidy to social protection programs could push low-income group capability.
In 2010 Unicef declared that social protection programs would bring the poverty rate to go down faster than the trickle-down effects of economic development policies.
There is a distinct possibility that social protection could play a role as an equity instrument to close gap between the top and bottom income groups.
In Brazil, for example, the Gini ratio (a measure of the income distribution of a country’s residents) was decreased by 28 percent as a result of a social protection program known as Bolsa Familia (Family Credit).
The same can be observed in Iran where the Gini ratio was brought down from 0.42 to 0.34 by shifting the subsidy from fuel to social protection. The Gini ratio takes a value between 0 (perfect equity) and 1 (the most extreme gap).
Unfortunately, the Gini ratio in Indonesia has climbed from 0.35 in 2008 to 0.41 in 2012. This should tell the government that a bigger fuel subsidy could make the gap between upper and lower income groups even wider.
In fact, the fuel subsidy is not directly enjoyed by low income groups. A study in 2010 in developing countries found that around 40 percent of high income groups enjoyed 80 percent of fuel subsidies.
In a global context, only 8 percent of fuel subsidies are enjoyed by the lowest 20 percent of low of income groups.
The small portion of fuel subsidy accessed by low income group could be due to the small number of vehicles the own and a low capability to participate in development in general.
The poor capability of low income groups is primarily due to bad health and educational status that make it difficult for them to participate in the economy.
However, based on previous experience, it is not easy to implement the social protection programs in this country, primarily due to mistargeted programs. Unfortunately, although the government has tried several social protection programs, those programs are not intensively evaluated.
Can the government design better social protection programs in term of strategy and budget so that the programs will increase welfare, especially among the low income group? ●
Although the government always sets the fuel subsidy in the state budget, fuel consumption has exceeded the benchmark in the last few years. In 2012, for example, subsidized fuel consumption exceeded 45 million kiloliters, well over the target of 40 million kiloliters.
Higher fuel consumption is the obvious result of more vehicles on the roads. In 2010-2011, for example, 8.7 million additional vehicles took to the streets.
The fuel subsidy is important mainly to keep the price goods and services stable. If the price of goods and services increases, inflation goes up, purchasing power goes down and the poverty rate increases.
The result of the fuel price increase in 2005 was that the poverty rate went up from 15.4 percent to 17.8 percent.
A fuel price increase is not the only factor that drags the poverty rate up. The absence of social protection programs can cause the poverty rate to increase. In fact, while the fuel subsidy continuously increases, the budget for social protection programs will always shrink, and this in turn will cause the poverty rate to go up.
When the increase in fuel subsidy knocks on to social protection programs, it will distort economic growth and job creation. Low social protection breeds low capability, making the low-income group less able to contribute to the economy.
Simply shifting the fuel subsidy to social protection programs could push low-income group capability.
In 2010 Unicef declared that social protection programs would bring the poverty rate to go down faster than the trickle-down effects of economic development policies.
There is a distinct possibility that social protection could play a role as an equity instrument to close gap between the top and bottom income groups.
In Brazil, for example, the Gini ratio (a measure of the income distribution of a country’s residents) was decreased by 28 percent as a result of a social protection program known as Bolsa Familia (Family Credit).
The same can be observed in Iran where the Gini ratio was brought down from 0.42 to 0.34 by shifting the subsidy from fuel to social protection. The Gini ratio takes a value between 0 (perfect equity) and 1 (the most extreme gap).
Unfortunately, the Gini ratio in Indonesia has climbed from 0.35 in 2008 to 0.41 in 2012. This should tell the government that a bigger fuel subsidy could make the gap between upper and lower income groups even wider.
In fact, the fuel subsidy is not directly enjoyed by low income groups. A study in 2010 in developing countries found that around 40 percent of high income groups enjoyed 80 percent of fuel subsidies.
In a global context, only 8 percent of fuel subsidies are enjoyed by the lowest 20 percent of low of income groups.
The small portion of fuel subsidy accessed by low income group could be due to the small number of vehicles the own and a low capability to participate in development in general.
The poor capability of low income groups is primarily due to bad health and educational status that make it difficult for them to participate in the economy.
However, based on previous experience, it is not easy to implement the social protection programs in this country, primarily due to mistargeted programs. Unfortunately, although the government has tried several social protection programs, those programs are not intensively evaluated.
Can the government design better social protection programs in term of strategy and budget so that the programs will increase welfare, especially among the low income group? ●
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