Why Is Reducing Energy Subsidies a Prudent, Fair,

and Transformative Policy for Indonesia? If there was one bold and timely policy to transform Indonesia, this is it. In 2012, spending on energy subsidies claimed more than one-fifth of the central government’s budget, that is, more than three times the allocation for infrastructure such as roads, water, electricity and irrigation networks, and three times the governmentwide spending on health. In addition to crowding out high-priority spending, subsidies disproportionately benefit households at the top of the income distribution and throw sand on Indonesia’s remarkable record of prudent macroeconomic management. Not to mention how subsidies create disincentives for saving energy, developing alternative energy sources, and reducing carbon dioxide emissions. Given their adverse short- and long-term economic consequences, reducing them—with the appropriate safe-guards to protect the poor—is a fair, prudent, and transformative policy. How Large Are Energy Subsidies? Indonesia has been subsidizing fuel (gasoline, diesel, kero-sene, and liquefied petroleum gas [LPG]) since the 1970s, when the world experienced its first oil price shock. The government fixed and kept the price of fuel at a very low level (below $.201 per litre) until 2005, with the budge