The Analysis of Fiscal Adjustment Impact on Income Distribution and Poverty in Indonesia: Computable General Equilibrium Approach

The general objective of this study is to analyze the fiscal policy of government expenditure on the Indonesian economic performance. Specifically, this study attempts to analyze the effects of (1) the contraction and expansion of the fiscal policy on the change in economic indicators, (2) the policy to reduce subsidy on fuel accompanied by giving compensation to poor household in the form of direct cash aid, (3) the policy of diverting fuel subsidy to food crops in agricultural sector on poverty level and income distribution, and (4) the policy of diverting fuel subsidy to other crops in an agricultural sector on poverty level and income distribution. The Indonesian government has implemented various policies to promote growth and at the same time to reduce the poverty level. However, there is a problem of budget deficit as a result of a big expenditure on subsidy. Thus, the government has tried to reduce fuel subsidy as it is a well known fact that fuel subsidy is less effective to alleviate poverty because the non-poor group receives more benefits of the subsidy compared to those of the poor. However, a fuel subsidy reduction has a negative effect on the poor. Therefore, the government implemented a compensation plan in the form of direct cash aid to the poor. Thus, this study attempts to analyze the advantages and disadvantages of this policy. This study also to analyze the alternative policies of the direct cash aid such as diverting fuel subsidy to the food crops and other crops in the agricultural sector. To achieve the above mentioned objectives, this study employed the Computable General Equilibrium (CGE) model, Foster-Greer-Thorbecke (FGT) Index, and beta density distribution function. It was found that the policy of giving direct cash aid to the poor as a result of a reduction in fuel subsidy has a negative impact on macro economics performance and an increase in poverty level, income disparity, and depth of poverty. Thus, the policy of diverting fuel subsidy to the food crops and other crops in the agricultural sector is an alternative policy to reduce the level of poverty and the disparity in income.