Rising Oil Prices Present Government with Two Difficult Options
Jakarta — Rising global oil prices have the potential to squeeze the government’s fiscal space and force authorities to make difficult decisions in managing the state budget and expenditure (APBN).
Lukman Hakim, an economist from Sebelas Maret University in Surakarta, believes that the surge in global oil prices could increase the burden of energy subsidies in the APBN. If this condition persists, the government must adjust fiscal policy to keep the deficit under control.
According to him, rising oil prices will directly impact the energy subsidy budget, which has long been one of the largest components of state expenditure. When oil prices exceed the assumptions in the APBN, the government needs to increase subsidy allocations or adjust policy.
In such circumstances, the government’s fiscal space becomes increasingly constrained because it must bear additional energy spending burdens amid funding needs for various priority programmes. Lukman said the government typically pursues several measures to keep the deficit below the legally mandated threshold of a maximum 3 per cent of gross domestic product (GDP).
One option available is to pursue efficiency or cut a number of programmes deemed not particularly urgent. However, if budget pressures intensify, the government could potentially consider adjusting subsidised fuel prices.
“When the pressure is severe, the choice usually comes down to either reducing government spending or adjusting energy prices,” he said.
Nevertheless, Lukman believes the government must be cautious in making such decisions because each policy carries consequences for the economy. Adjusting fuel prices, for instance, could potentially drive inflation upwards and squeeze household purchasing power.
On the other hand, cutting government programmes could also dampen economic activity. Therefore, according to him, the government must maintain a balance between fiscal stability and the sustainability of development programmes.