July 11 (Bloomberg) -- Indonesia's budget may come under pressure as the government prepares to increase subsidies to cap fuel prices and match a jump in crude that has more than doubled in the past year.

``If oil prices increase to $170 a barrel, of course there will be problems,'' Vice President Jusuf Kalla said in an interview in Jakarta yesterday. The government, which bases its budget assumptions for oil to average at $140, will spend more to cap pump tariffs should fuel costs extend gains, he said.

Kalla ruled out a further increase in fuel prices after the government raised pump costs for the first time in almost three years in May, on concern it will spur inflation as President Susilo Bambang Yudhoyono prepares for elections due in 2009. The government, waning in popularity, may spend as much as $33 billion in energy subsidies next year.

``They will respond once oil price reaches $160 a barrel, by raising fuel prices,'' said Chetan Ahya, managing director for research at Morgan Stanley in Singapore. If oil extends gains, ``they may be inclined to raise fuel price before next year because there is lot of time to hold prices till elections next year.''

Crude oil for August delivery rose as much as 2.4 percent to $145.10 a barrel on the New York Mercantile Exchange and was trading at $145.04 at 10:59 a.m. in London. Yesterday, it soared $5.60, or 4.1 percent, to settle at $141.65 a barrel, the biggest one-day increase since June 6. Futures reached a record $145.85 a barrel on July 3.

`Politically and Socially'

Yudhoyono raised fuel prices by about 30 percent in May to reduce the government's subsidy burden. That made it more expensive to transport food, steel and cement across the 18,000 islands that make Indonesia the world's largest archipelago, pushing the inflation rate to 11 percent in June, the highest in 21 months.

The government won't raise fuel prices ``this year and the election year,'' Kalla, who is reading ``The Coming Economic Collapse: How You Can Thrive When Oil Costs $200,'' by Stephen Leeb and Glen C. Strathy, said, adding that ``politically and socially, you cannot do that.''

On the last two occasions when the government raised fuel prices, the nation's refined oil trade deficit exceeded an annualized 4 percent of gross domestic product, according to Morgan Stanley. In September 2007, the measure was 4.7 percent of GDP, while in May, it was 4 percent of GDP, the investment bank's data showed.

Indonesia forecasts it will get 236.5 trillion rupiah ($25.8 billion) in tax and non-tax revenue from oil and gas companies this year, assuming an oil price of $95 a barrel. Indonesian crude oil price has since risen 41 percent.

President's Popularity

Yudhoyono's popularity dropped after the increase in petrol, diesel and kerosene prices, the Jakarta Post reported on June 30, citing a survey conducted by Indo Barometer.

The government's move to build 10,000 megawatt of power plants mainly using coal will help Indonesia reduce its diesel subsidy burden, while forcing households to switch to liquefied petroleum gas will reduce the cost of capping kerosene prices. Such measures will help the government save as much as 300 trillion rupiah in three years, Kalla said.

To contact the reporters on this story: Wahyudi Soeriaatmadja in Jakarta at wahyudi@bloomberg.net; Arijit Ghosh in Jakarta at aghosh@bloomberg.net

Last Updated: July 11, 2008 08:01 EDT