Fuel subsidy has to be cut but those in productive sectors will get more help

THE amount of money Indonesia spends on the fuel subsidy is too big and must be cut back gradually, president-elect Joko Widodo said.

But he believes it is also important that the impact of any hike in fuel prices be cushioned by extending help to the poorest segment of society, who are often hardest hit by any cut to fuel subsidies.

However, Mr Joko said he is less inclined to have direct cash transfers to the poor, and instead wants the help diverted to productive activity and workers like farmers, fishermen, and microentrepreneurs.

"Our economic team must make not only the economic calculations but also the social and political calculations. It's not easy," he told The Straits Times.

Fuel subsidies have always been a political lightning rod in Indonesia, where the price of the cheapest fuel is 6,500 rupiah (70 cents), almost half the price of the unsubsidised albeit higher-grade alternative.

Although the better-off have disporportionately benefited from these subsidies, reducing them has been difficult as the impact, especially on inflation, is felt hardest among the poor. Political parties have also seen opposing price hikes as a way to gain support, forcing the outgoing government to scrap a planned subsidy cut in 2012, that went ahead in 2013 amid significant street protests.

Observers had hoped a imminent subsidy cut would have been factored into the government budget for 2015, which President Susilo Bambang Yudhoyono announced last Friday (Aug 15), but this did not materialise.

But Mr Joko's economic advisors say they will raise the matter when the outgoing president's team starts talks on the handover in the coming weeks, with the possibility of a joint announcement between both sides on a fuel price hike before the change of government on October 20.

Otherwise, spending on fuel subsidies would rise from nearly 250 trillion rupiah (S$26.9 billion) this year to over 290 trillion rupiah in 2015.

The savings will also be channeled to Mr Joko's campaign pledges of an 'Indonesia smart card' and an 'Indonesia healthcare card' that would guarantee poor families free basic education and healthcare needs.

"That's the basic human need," he says of why education and health will be key priorities.

Also top of his list is making the bureaucracy more efficient through online systems that will help address corruption among civil servants, and increase state revenue.