Widodo to Switch Off Middle Class Power Subsidy in Budget Reform

Updated on

Having watched his economic reform momentum falter in recent months, Indonesian President Joko Widodo is resurrecting his biggest policy success by cutting more subsidies. That will test his support with voters.

The government is proposing to remove electricity subsidies next year for households that use between 450 and 900 watts, a common level among middle class families in the capital. Rather than subsidizing state power company PT Perusahaan Listrik Negara, money will be shifted directly to the poor, Askolani, a director general at the finance ministry, said on Tuesday.

The plan by Jokowi, as the president is known, would build on the scrapping of decades-old gasoline subsidies this year, which freed up billions in the budget. With growth in Southeast Asia’s largest economy at the slowest in more than five years and government spending so far struggling to revive it, the move risks a backlash from an emerging middle class that voted the former Jakarta governor into power last year.

“It will make the government look bad: it looks for more money while it needs to improve spending,” said Rangga Cipta, an economist at PT Samuel Sekuritas in Jakarta. “We’re still not sure if the government is able to spend, and without any improvement in spending quality, the impact will be negative.”

The proposal follows a raft of micro-measures in recent weeks to revive waning domestic demand, from cutting luxury taxes to loosening mortgage rules. Yet the stock market has fallen more than 5 percent in June and the rupiah is Asia’s worst-performing currency this year, as investors are looking for bolder structural reforms such as improving the bureaucracy and getting subsidy savings spent on infrastructure projects.

Poor, Vulnerable

“As long as he continues with reforms, it will be a show of commitment, and I think that’s what investors want to continue to see,” said Christy Tan, head of markets strategy for Asia at National Australia Bank Ltd. “I think it’s a move in the right direction.”

The government has allocated 73.1 trillion rupiah ($5.5 billion) for power subsidies in the 2015 budget. Last year it gave a subsidy of 99.3 trillion rupiah to Listrik Negara, which reported net income of 11.7 trillion rupiah. The company raised electricity tariffs for heavier power-using households and industrial companies last year under the previous government.

“The subsidies will be shifted to the needy, that is households that are poor and vulnerable,” said Suahasil Nazara, head of the finance ministry’s fiscal agency.

Parliamentary Opposition

Jokowi has pledged to address a “dangerous” level of inequality that threatens the stability of the world’s fourth most-populous nation. While wages have risen steeply for unionized workers in recent years, protesters have rallied outside the state palace over the cost of fuel, food and corruption during his first nine months in power.

The 2016 budget proposals still need to be approved by parliament, where the president has a minority. His ability to weather opposition depends on convincing the public that the savings will be used to improve their lives. The subsidy for households using 450 watts should be kept, said Johnny Plate, deputy chairman of the NasDem Party, a member of Jokowi’s coalition.

“This will be an additional burden on the people, as electricity is a basic need,” Samuel Sekuritas’ Cipta said. “Eventually people will have to cut other spending, and purchasing power will fall.”

The government will strive for 5.2 percent economic growth this year, down from its target for 5.7 percent, Finance Minister Bambang Brodjonegoro said this week. Policy makers are also trying to cool the highest inflation rate in Asia.

The government has been rolling out free health and education cards to poor families this year, in a country where 43 percent of people lived on under $2 a day in 2011, according to the World Bank. Sugenda, a 39-year-old father of three who uses 900 watts of power at his rented house in Jakarta, hasn’t got any such cards and is unhappy about Jokowi’s subsidy moves.

“And now he want to raise electricity prices?” said Sugenda, who spends 10 percent of his outgoings on power. “I’m very disappointed since I didn’t get any compensation. I will protest on that.”