The Elimination of Fuel Subsidies to Increase the Education Budget in Indonesia

Abstract

Government so far seems hesitant to reduce fuel subsidies, moreover to eliminate them. This paper is intended to determine the impact of reducing the fuel subsidies on the economy. Several study results simulated with KUT Indorani Model shows that the reduction of fuel subsidies indeed has a negative impact on the economy in short term, in this case especially macro-economy and inflation. The impact from magnitude aspect is relatively small. The reduction of fuel subsidies that have consequence in raising the fuel prices will bring the domino or spiral effect that is bringing the impact on the raise of other goods and service prices. The negative impact of reducing the fuel subsidies in short term can be reduced by implementing the combination of fiscal and monetary policy. Fiscal policy implemented by applying social safety net by government. On the other hand, monetary policy by Bank Indonesia can be implemented by reducing the money supply through the instrument by raising the interest rate of Sertifikat Bank Indonesia (SBI). By looking at the objective conditions, the government should not hesitate to reduce the fuel subsidies and then eliminate them. The budget for fuel subsidies can then be allocated to increase the education budget. By increasing the budget so the availability of educational infrastructure both in quantity and quality can be improved. Next, the quality of teaching and learning process at all levels of education will increase. This process in turn will produce a better quality output. In other words, the increase in education budget will accelerate the development in education sector. In addition, the increase in education budget can also boost the economic growth.

Keywords: fuel subsidies, education budget, education infrastructure.