The Effect of Government Policy in Giving Inadequate Fuel Subsidy and

Compensation on Government Fund and Consumer Surplus

Chapter 1: Introduction

Fuel is an inseparable part of our lives. Through the power of fuel, we manage to unite a
nation filled with countless islands that stretches over 5000 km in length from east to west.
Through the power of fuel, our nation has made alliances with a lot of countries. Hence, the
recent increase in fuel prices has thrown a lot of Indonesian citizens into a state of confusion.
The 30 percent price hike for solar (from Rp5,150 to Rp6,800) and the 32 percent price hike for
pertalite (from Rp7,650 to Rp10,000) fuel price was greeted with vocal opposition by the locals.
To most Indonesians, this price rise might be seen as a threat, especially for those who use
petrol-fuelled vehicles as their main means of transport. That being said, vocal opposition from
most people indicates that they feel disadvantaged by this policy.

According to Kemenkeu and the government, the petroleum price hike is a necessary
move to further develop Indonesia’s economy. The government claimed that the current
government fund has almost reached its ‘bubble’ and needs to be revised as soon as possible. If
not, the ‘bubble’ effect will be charged into 2023 government funds and result in a more
complicated implication on government program execution. While this policy has its sacred
mission, people still question the projection of this policy to reach Indonesia's prosperity. Thus,
the essence of the increase in fuel price is a topic that we as a society need to understand.

The main question that comes to everyone's mind is what is the purpose and intention of
the government to raise the fuel price. The government also has a lot of consideration with the
ministry, representative, and Pertamina to reach a certain number of prices, but what are the
metrics for reaching a certain number of prices? Where will the subsidy be allocated? Not only
that, does the external environment such as the Russia-Ukraine War, the rising interest rate in
developed countries, and the pandemic have such an impact on deciding fuel prices? Is the
timing significant? All of these principal questions are needed to be answered to analyze the
impact and the strategic policy of the government.

The impacts of this policy are worth asking about. People need to know who will lift the
most burden of this policy. How does this event correlate with consumer surplus? If so, how
could consumer surplus be correlated with economic welfare? If the policy diminishes the
consumer surplus, what are the trade-offs from this policy? Most importantly, how does the
contraction of fiscal policy affect Indonesia’s consumer surplus and government funds?

This paper will be published to provide the public with documents and data gathered
from updated and trusted information. The paper’s second purpose will be to aid in the
problem-solving of various issues, whether it is public, private, or government-run, caused by
fuel prices. The paper’s final objective is to give its readers trusted descriptive data from both
primary and secondary sources.
Other than objectives, we have also assessed the benefits of this paper’s publication. The
research paper’s first benefit is to increase the public’s problem awareness of issues concerning
the increasing of fuel prices. Thus, the public will be further aware of how to deal with and react
whenever the same or similar issues arise again. The second benefit will be a guide for various
organizations to solve problems concerning the rising of fuel prices. This paper also provides
some economics language and principles that are commonly used by economists and even
society. That being said, this paper expects the reader to be more conscious and could implement
the economic principle more fluently in daily activities and strategic problem solving. The final
benefit will be for the paper to become a case study for students worldwide (especially for those
who major in economics or are correlated with economics), which supports their studies and the
research they are performing.

However, despite the paper’s benefits, it also includes some limitations. One of them
being our experience.. This paper may not provide the perfect inferential statistics to be used in a
particular strategic case, but the paper provides primary data to be easily used and understood by
society. Another reason is the risk of bias. Due to the nature of our data being obtained from
news and official documents, there is a chance the information included can include biased
statements and data from the writing party. Lastly, this issue just happened 1 month before the
writing of this research paper, therefore the descriptive statistics and the source of inferential
statistics (such as surveys) are still limited in the open domain.

Chapter 2: Literature review

In September 2022, many Indonesia’s people from different layers of society united to
advocate about the rising fuel price. The rising itself was pretty significant, thus people wanted
the government to cancel and revise the policy that has been ratified lately. Even though Mrs Sri
Mulyani and the government already provide an open conference, through the government
funding plans for 2023 that they’ve made public, to explain why the policy was implemented, the
government never specifies and publishes an official data for the society to understand. To the
extent, there was a contradiction and ambiguity on the data that the government provided with
the implementation of the government policy.

According to the officials, the ultimate goal of minimizing fuel price subsidy and
compensation is to provide more monetary incentives into the government fund. If the
government funds are already stable enough then infrastructure, pandemic recovery, and the
percentage of national debts could be controlled effectively. Unfortunately, this policy was
greeted by people negatively. People mention that the government misinterprets the people's
condition and purchasing power, thus the government excessively raises the fuel price.

One of the main obstacles that was served by the government funding plans for 2023 is
that the data that was provided by the plan contradicts the action that was done by the Indonesian
Government. Moreover, the plan that the government provides to the public mentions an increase
in subsidies. Yet, the paper is not very transparent about how the government distributes the
increased subsidies.
 With this essay, we aim to fill the gap created by this issue by providing updated data
gained from various trusted sources. Simplified information is also one of the ways we intend to
fill the gaps left. The information contained within our essay will provide readers with
easy-to-understand knowledge, allowing people of all kinds of backgrounds to be able to
understand, interpret, and problem solve on their own the issues available. Our third way is by
explaining to our readers the effect of rising fuel prices, specifically on Indonesia’s infrastructure
and government funds.

Chapter 3: Methodology and Method

Our method of research focuses on using quantitative methods which are widely used
when studying economics. We separate our sources into three different groups based on their
contents. The first criteria was data which contents were related to the national budget plans for
2022-2023 period, especially data in which infrastructure the budget is allocated into. The
second criteria is the data about Indonesian average income rate. And the last criteria is the data
about Indonesian purchasing power parity to determine Indonesian consumer surplus on recent
changes. In our research, there are no respondents involved as the data is procured and analyzed
by the researcher. Due to the different natures of the data that we need to process in the research,
the steps that we need to take are dependent on the types of data that we need to process. Even
though the data are clear enough, it is crucial to input the actual government budget regarding
fuel price subsidy and compensation. The official data regarding the actual government subsidy
has not yet been published by the official due to the time barrier from the sudden changes with
the timing of writing this paper. Thus, researching the exact value through media and Ministry of
Finance discourse are also crucial.

The “Rancangan APBN Tahun 2023: Peningkatan Produktivitas untuk Transformasi

Ekonomi yang Inklusif dan Berkelanjutan” is primarily used to obtain primary data and
descriptive statistics. The data include all government plans on Indonesia’s economics
assumption and the main budget for government funds. The steps on processing the data are as
follows. Firstly, each of the descriptive statistics are classified into 2 categories: Subsidy and
Compensation. Each of the data are used to determine the quantitative changes (from year 2021
until 2023), quantitative value of the government budget increase, and the allocation outlook on
minimizing the fuel subsidy and compensation. Then, descriptive analysis was applied to answer
the size of government expenditure and what is happening in terms of the domestic economic
environment. Lastly, each of the data are contextualized to determine if there is any anomaly and
the reason why the government decides to diminish fuel subsidy and compensation. At last, the
growth rate is further analyzed to determine whether the Indonesian national budget is
experiencing a bubble.

Data “Riwayat Perkembangan Harga BBM Subsidi Era Jokowi” published by

“DataIndonesia.id” are used to make a comparison table YoY (Year on Year) and to visualize the
data by making a line graph for Solar and Pertalite. The data provide quantitative value of Solar
and Pertalite fuel price from 2017 to 2022. To analyze the data, fuel prices each year are
imputed into a comparison table consisting of year, type of fuel, and the actual price. When the
table has been done, the line graph could be made by connecting each of the point (in which
Y-axis is the price and X-axis is the year) or by inputting the data to Microsoft excel. Finally, the
data are used to determine the significance of government subsidy and the proportionate of
government fuel subsidy and compensation.

The “Dow Jones Industrial Average” and “Nikkei 225 Stock Index Average” are data
published by the Federal Reserve history and grips.ac.jp respectively. These data will be mainly
utilized to gain descriptive statistics and secondary data. The data encompasses the precursing
and succeeding economy of both the great depression and Japan’s lost decade, two of the highest
profile economic recession in recent history. In processing the data, the data from both the great
depression graph and Japan’s lost decade graph is analyzed. Both graphs are then compared and
all similar trends that are found in both graphs are noted. The graphs are then compared once
again, this time with the data from “Rancangan APBN Tahun 2023: Peningkatan Produktivitas
untuk Transformasi Ekonomi yang Inklusif dan Berkelanjutan”, in order to find trends in the
subsidy and compensation graph that is also present in the data from the great depression and
Japan’s lost decade.
 This data will be analyzed in tandem with “Temuan Survei Nasional Kondisi Ekonomi
Dan Peta Politik Menjelang 2024” that was published by Lembaga Survei Indonesia (LSI) to
discover the connection between the average wage and citizen’s consent for the price increase. It
contains a descriptive statistic about people's consent on whether the rising fuel price meets its
trade-off or not. This paper focuses on using conjoint analysis to assess the descriptive statistics.
This type of analysis focuses more on the exact numerical value of the respondent to determine
majority consumer preference. By determining the numerical value of people respondent
concerning the change of fuel price, the value is used to predict how a consumer will react to a
given product and help determine which policy makes it into the right allocation for government
funds. It also helps determine the value that consumer wants to purchase to indicate the
consumer surplus qualitatively.

Chapter 4: Result
4.1 RAPBN 2023 Data Screenshot
Data 4.1.1
Data 4.1.2
Data 4.1.3

Data 4.1.4

The data shows that fuel subsidy and compensation has been increased by the
government since APBN Perpres 98/2022 was issued.
Data 4.1.5

The increase of fuel subsidy and compensation makes RAPBN 2023 run into deficit
status of 2,85% GDP.

4.2 Fuel Price Comparison YoY

2017-2022 (6 tahun)

Year 2017 2018 2019 2020 2021 2022

Pertalite 7500 7800 7650 6450 7650 10000

*

Solar* 5150 5150 5150 5150 5150 6800

*All prices shown in Rp (Indonesian Rupiah)

4.3 Fuel Price Comparison Line Graph

*Prices shown are in Rp (Indonesian Rupiah)

The data above shows a big hike in subsidized fuel prices from 2021 to 2022 especially
for solar as the price was at a constant in prior years.

4.4 Fuel Subsidy and Compensation Comparison YoY

Rp Triliun

Year 2018 2019 2020 2021 2022 2022 Perpres Current

Subsidy 153,5 136,9 108,8 140,4 134,0 208,9 355,5

Compensation - 7,5 91,1 47,9 18,5 293,5 293,5

Total 153,5 144,4 199,9 188,3 152,5 502,4 649

4.5 Fuel Subsidy and Compensation Line Graph

Numerical values on the y-axis represents trillions in Rp (rupiah)

The data above presents the spike in both subsidies and compensations currently
happening in Indonesia.
4.6 Example of Past Major Economic Recession

The line graphs above represent the pattern of an economy that is bubbling and followed
by an economic recession afterwards.
4.7 Survey from Lembaga Survei Indonesia Result

The result of the survey shows that 58,7% of Indonesians agree that the government
should maintain the price of subsidized fuel despite the current hike in world oil prices, even if it
means that Indonesia needs to increase its loan.

4.8 Consumer Surplus Calculation

Solar Consumer Surplus

The value that consumer are willing to buy = 2021 Solar Fuel Price = Rp5,150/liter
The value that consumer actually pays = 2022 Solar Fuel Price = Rp6,800/liter

Total Consumer Surplus = 2021 fuel price - 2022 fuel price

= - Rp1,650/liter

Solar fuel consumers lose Rp1,650 of consumer surplus for every liter puchased.
Pertalite Consumer Surplus
The value that consumer are willing to buy = 2021 Pertalite Fuel Price = Rp7,650/litre
The value that consumer actually pays = 2022 Pertalite Fuel Price = Rp10,000/litre

Total Consumer Surplus = 2021 fuel price - 2022 fuel price

= - Rp2,350/liter

Pertalite fuel consumers lose Rp2,350 of consumer surplus for liters purchased.

Chapter 5: Discussion

5.1 Government funds Result Discussion

In the line graph of image 4.1.2 from the results section, the government has significantly
increased the budget for both subsidy and compensation for fuel prices, especially in APBN
Perpres 98/2022 section, where the funding of compensation increases by 1586.486% from Rp
18,5 trillion to Rp 293,5 trillion, to "dampen" the effect of the global oil price inflation. However,
this significant hike in the budget leads to a budget graph often found in an economy
experiencing a bubble. This trend can be observed by looking at data 4.6, which shows past
examples of economic recession from the great depression that occurred in the USA from 1929
to 1939 and the Japanese lost decade from 1991 to 2001. Based on the trend observed from both
the data represented in 4.6, it can be seen that the national budget for both subsidy and
compensation is showing the same trends that are offered by both the excellent depression graph
and the Japanese lost decade graph before the recession where the economy is booming in a short
period before crashing down.

The 4.1.3 data also shows the government's prediction on people's Pertalite and Solar
usage in the current year (2022). The government predicts that Pertalite and Solar subsidies and
compensation will run out in October 2022. Increasing mobilization and economic activity is the
main reason subsidies and compensation will run out. Mobilization and economic activity will
increase because 2022 is the year of the pandemic recovery transition, and such limitations and
restrictions to have direct activity have been reduced. This evidence increases the urgency to
increase the fuel price. If the APBN Perpres 98/2022 addition runs out in October, the
government needs to add more financial power to the government funds, leading to a bubble no
one wants. To this extent, Ms. Sri Mulyani, the minister of finance, explained in the press
conference that the government will increase the number of subsidies and compensation to
approximately Rp600 Triliun and still need to increase the fuel price. The evidence shows that
the government cares about the people's welfare and provides the best policy for the people to
feel in the long run.

Despite showing the same trend as previous high-profile economic recessions from years
ago, the sudden hike in both subsidy and compensation for fuel is necessary to stabilize the price
of subsidized fuel in Indonesia. This is only possible with an increase in both subsidy and
compensation, as the current world market for crude oil prices is highly volatile. If this trend
continues, however, it is feared that the Indonesian economy will not be able to support further
the budget needed to sustain both subsidy and compensation for fuel, leading to a more extreme
and sudden increase in subsidized fuel prices.

From image 4.1.5 of the results chapter, Indonesia's issue with the balance between
government income and expenditure can be seen. From the data gained, Indonesia's national
income reaches Rp. 2436,9 trillion for 2022. Unfortunately, Indonesia's government expenditure
outweighs the income with a total of Rp. 3169,1 trillion within the same year. Moreover, tables
4.4 and 4.5 on the graph presenting the relationship between fuel subsidy and compensation have
shown a higher compensation price than fuel subsidy in the recent presidential decree. A third
issue will be the increasing fuel prices around the world which will affect Indonesia's fuel supply.
From this, it can be deduced how the government's implementation of fuel subsidy will result in
a deficit in the national funds due to the urgent nature of the country's income and expenditure
balance along with the outcome of the fuel subsidy to the government and the international
increase of fuel prices.
5.2 Consumer Surplus Result Discussion

To determine the consumer surplus of a certain good without knowing the supply and
demand curve, the only way to calculate consumer surplus is by determining the price that
buyers are willing to buy and the price that buyer actually pays. Based on the data, it is safe to
assume that the price buyers are willing to pay is the 2021 Pertalite and Solar price. The LSI
survey in 2021 has proven that 58,7% of respondents did not agree with the government policy
to raise the fuel price. Respectively, buyers still want to buy fuel at the 2021 price, but not the
2022 price. The price buyers actually pay could easily be determined by taking the actual fuel
price in status quo after the government policy was executed.

According to the calculation, Solar fuel has a total consumer surplus of -Rp1,650 per liter
and Pertalite fuel has a total consumer surplus of -Rp2,350 per liter. The minus sign indicates the
loss of the consumer surplus for consumers. The calculation has proven the government policy
on increasing the fuel price makes consumer loss their consumer surplus. Specifically,
consumers lose Rp1,650 of consumer surplus if they buy Solar fuel and lose Rp2,350 of
consumer surplus if they buy Pertalite fuel. Calculating the consumer surplus could also help
determine the economic welfare of its stakeholder. The stakeholder of BBM and the government
are the people itself. Moreover, the one who bears the burden of the government policy is the
people too. It is illogical to state that the government neglects its people's interest by neglecting
the people's grievance. That being said, the government policy in increasing the fuel price
diminishes the economic welfare in terms of consumer surplus for Indonesia’s people as the main
stakeholder for the government and Pertamina.
Chapter 6: Conclusion

Indonesia's government did not provide inadequate fuel subsidies and compensation. The
government has followed the trend for commodity prices by increasing the number of fuel
subsidies and compensation. To this extent, the Minister of Finance has calculated Indonesia's
risk, trade-off, and benefits to fully cover the fuel subsidy and compensation. If the government
fully follows the trend of commodity prices, the government fund will experience a bubble. The
effect of the government fund bubble will be a liability for the following year's government.
Thus it is better not excessively to increase the subsidy. The increased price of fuel subsidy acts
as a response of Indonesia's government to the increase of fuel prices worldwide. The
government is trying to maintain a balanced budget for fuel subsidies to ensure that Indonesia's
economy stays stable.

Although the government has made a policy to avoid the government fund bubble, the
loss of consumer surplus is the trade-off of this policy. First, the main stakeholder of the
government, which is the people themselves, must bear the burden of the changes. People need
to spend more money for each liter of fuel they buy. Finally, the loss of the consumer surplus
diminishes the economic welfare in terms of consumer surplus.
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