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Subsidising The Future – 7 Reasons Why Scrapping The Fuel Subsidy Was A Good Idea



Subsidising The Future – 7 Reasons Why Scrapping The Fuel Subsidy Was A Good Idea

As of January 1st, Jokowi has entirely scrapped fuel subsidies, a move feared by many of his predecessors that has received much public condemnation over the years.

Now only a Rp 1,000 subsidy remains for diesel used for public transport and Indonesia’s millions of fishermen. For the first time in generations, the price of petroleum will reflect global market prices.

This move has not been without political recoil. But thanks to falling oil prices, petrol now costs Rp 7,600 per litre as opposed to Rp 8,500 when it was subsidised in December. Fortune has favoured Jokowi.

But fortune does favour the brave, and it was a bold move to instigate in such an oil-addicted nation. As is the case with all addicts going cold turkey, the advantages may only become obvious in the future.

Here are 7 reasons why Indonesia will benefit from abandoning the fuel subsidy.

1) Freeing 200 Trillion Rupiah

The move has given Jokowi far more room for fiscal manoeuvres than any of his predecessors. This money will be vital if he isn’t to go back on his election promises. You can do a lot of good with $16 billion.

2) Subsides Equalled 20% Of Government Spending

Fuel subsidies used to account for more than infrastructure and social welfare combined. The program was meant to help the poor, but instead only really supported the car-owning middle class.

3) Funding Jokowi’s Programs

With the Indonesia Health Card, the Indonesia Smart Card and Family Welfare Fund – the Indonesian people are poised to get support from the government not seen since the days of Sukarno. These programs aim to provide free health insurance to the poor, 12 years of free schooling (as well as subsidised university education if accepted), and cash transfers to the poor (to the tune of roughly 200,000 rupiah a month).

4) Reducing the Budget Deficit

The government will also use the money saved to reduce the budget deficit from 3% to 2%. This is vastly important when trying to implement the progressive government spending reforms, as Jokowi intends.

5) Labour Effects

A healthier and better-educated workforce could see Indonesia suffer less at the hands of extractive industries. Indonesia could enhance its service sector and higher-value manufacturing (e.g. smartphones and gadgets), rather than the, quite frankly, criminal slave-labour operations producing trainers, t-shirts and handbags. 

6) Environmental Impact

Now, it’s no secret that the burning of fossil fuels is of great consequence to the climate. Indonesia is a great, yet tragic example of a beautiful country that gets poisoned daily by the overuse of dirty energies. Of course, it is a small move towards a greener world, but a move we need to make.

7) Turning to the Deeper Questions

Unfortunately, there are bigger problems in Indonesia than fuel subsidies. With the relatively smooth transition away from the wasteful subsidy, Jokowi can now focus on the thornier issues of fixing a somewhat disjointed tax regime, broken legal institution, and a rigid government bureaucracy that’s held together by corruption.

It took Barrack Obama 427 days to write his health care bill into law. It took Jokowi just 2 weeks to fulfil his health care promise. With this cunning redistribution of funds, he has put himself in a position to enact his election promises in a way Obama never fiscally could.

Whatever happens, Jokowi is off to a good start.

Note: Stats and facts collected from The Economist’s article A Good Scrap

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