Economist warns government on decile-based subsidies: Don't just cut fiscal load

Indonesia's government is implementing a decile-based system to ensure subsidies are more accurately targeted, affecting programs such as Pertalite fuel, the Indonesia Smart Card (KIP), and affirmative action in school admissions. This approach aims to deliver aid more precisely to intended beneficiaries.

However, economists are urging the government to ensure the policy's primary goal is effective targeting rather than simply reducing the national fiscal burden. Rizal Taufikurrahman, Head of Macroeconomics and Finance at the Institute for Development of Economics and Finance (Indef), stated that while decile-based subsidies are more rational than universal ones, their effectiveness hinges on data quality and policy design. He warned against using deciles merely as an administrative tool to cut the number of recipients for fiscal savings.

Taufikurrahman explained that the main objective should be to minimize inclusion errors (aid reaching the non-poor) without increasing exclusion errors (aid failing to reach the poor). He noted that deciles represent relative economic standing, not absolute capability, and households in higher deciles might still face economic hardship due to high dependency ratios, job losses, or regional cost-of-living differences.

Using a single decile indicator across multiple policies like KIP, fuel subsidies, and social assistance risks systemic errors if the underlying data is inaccurate or outdated. For energy subsidies like Pertalite, Taufikurrahman suggested combining decile data with vehicle characteristics, consumption patterns, and location. He argued that success should be measured by reduced subsidy leakage, not just by cutting the number of recipients, especially if those cuts disproportionately affect vulnerable groups due to data inaccuracies or rigid policy design.