Government's Fiscal Test Amid Iran War, Weighed Down by Subsidy Burden and Inflation Control
Jakarta – The Prasasti Center for Policy Studies has reported that the effects of the Middle East conflict involving Iran, the United States, and Israel could extend to the government’s fiscal position, particularly through the energy subsidy mechanism.
Piter Abdullah, Policy and Program Director at Prasasti, explained that Indonesia’s State Budget (APBN) structure remains quite sensitive to fluctuations in global oil prices.
“Consequently, spikes in energy prices can quickly increase the burden of government spending,” he said during an exclusive interview on the impact of the Iran-US conflict escalation on Indonesia, Thursday (12 March 2026).
Piter noted that several economic simulations indicate that if average oil prices hover around $92 per barrel, the budget deficit in 2026 could potentially widen to approximately 3.6–3.7 per cent of Gross Domestic Product (GDP).
This figure exceeds the 3 per cent fiscal deficit limit that has long served as Indonesia’s fiscal discipline benchmark.
“When oil prices rise, the government faces difficult policy choices. Restraining fuel price increases through subsidies will add pressure to the APBN. Conversely, if prices are released to follow market mechanisms, the impact can be directly felt in inflation and public purchasing power,” Piter explained.
Piter assessed that in a situation of rising global energy prices, there are several possible policy responses in managing energy subsidies.
When domestic fuel prices are maintained whilst global oil prices increase, the burden of energy subsidies in the APBN could surge significantly.
“Conversely, if fuel prices are adjusted to follow market mechanisms, inflationary pressures as well as increases in transportation and logistics costs can be immediately felt by the public and business actors. Another alternative is limited subsidy increases accompanied by various price stabilisation programmes, although this approach would still increase state spending,” he explained.
Piter said the main impact of this conflict is causing a rise in global oil prices. Globally, this will also affect disruptions to logistics supply chains.
Additionally, global trade transaction activities, including exports and imports, are forecast to decline.
This will also be felt by Indonesia, particularly from the perspective of importing raw materials. When economic activity is disrupted, tax revenues will also be disrupted.
“Oil prices will cause potential increases in domestic fuel prices,” he stated.
He added that if allowed to rise unchecked, fuel prices could instantly cause inflation to become uncontrollable.