Indonesian Government Proposes $32.6 Billion of Subsidy Spending in 2014

Subsidy spending accounts for the largest portion of central government spending and - by far - exceeds capital expenditures, even though the latter is needed for Indonesia's much-needed infrastructure development.

	Revised State Budget                2013	State Budget Draft             2014
Total State Spending	1,726.2	1,816.7
- Central Government Spending	622.0	612.7
a. Personnel Expenditure	233.0	276.7
b. Goods Expenditure	206.5	203.7
c. Capital Expenditure	192.6	205.8
d. Interest Payments on Debt	112.5	119.5
e. Subsidy Expenditure	348.1	336.2
f. Grant Expenditure	2.4	3.5
g. Social Expenditure	82.5	55.9
- Transfer to Regions	529.4	586.4

^{in trillion rupiah}

Indonesia's high amount of subsidy spending, which increases almost every year, is a concern to many. In 2014, proposed subsidy spending equals 3.5 percent of Indonesia's gross domestic product (GDP). Between 2008 and 2013, realization of the subsidy budget spending increased IDR 72.8 trillion, or an average of 4.8 percent per year. This increase is due to changes in macroeconomic assumptions, such as the exchange rate, Indonesia's crude oil price and the volume of subsidized fertilizers.

Most of subsidy expenditure in 2014 is allocated for subsidized fuels and electricity. Subsidies for gasoline, LPG and bio-fuels are proposed at IDR 194.9 trillion. This amount is IDR 4.96 trillion lower (or 2.5 percent) compared to the allocation in the 2013 state budget (IDR 199.9 trillion). Since 2009, fuel subsidies have experienced a 272 percent surge, and will account for 10.7 percent of total government expenditures in 2014 according to the government's proposed budget.

	Revised State Budget                 2013	State Budget Draft              2014
Energy Subsidy	299.8	284.7
- Fuels	199.9	194.9
- Electricity	100.0	89.8
Non-Energy Subsidy	48.3	51.6
- Food	21.5	18.8
- Fertilizer	17.9	21.0
- Seeds	1.5	1.6
- Public Service Obligation	1.5	2.2
- Credit Programs	1.2	3.2
- Tax Subsidy	0.8	1.0

^{in trillion rupiah}

The government uses a number of parameters to assume the fuel subsidy budget at IDR 194.9 trillion. These parameters include an Indonesian crude oil price at USD $106 per barrel, an exchange rate of IDR 9,750 per US dollar, and domestic consumption of subsidized fuels estimated at 50.5 million kilo liter (which is about 2.5 million kilo liter more than in 2013).

With an economy that is growing at a pace of about six percent, an increase in oil consumption cannot be avoided, despite the government's decision to raise prices of subsidized fuels in June 2013. Rapid economic expansion requires a greater energy supply. Nevertheless, analysts feel that too much subsidies will also weigh on the budget, particularly if these subsidies, like the fuel subsidies, are misplaced: Indonesia's middle class segment benefits more from these fuel subsidies than the poor.

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