Fuel has long been the lifeblood of mobility in Indonesia. From personal vehicles to public transportation, fuel consumption plays a crucial role in supporting both the economy and daily life. However, since global oil prices tend to fluctuate and are not always favourable for consumers, the government provides subsidies to keep fuel prices affordable, especially for lower-income groups who rely heavily on fossil-fuel-based transportation. Fuel subsidies serve as a strategic policy tool aimed at controlling inflation, maintaining purchasing power, and ensuring stability in sectors dependent on transportation. They help prevent price spikes that could affect production costs, distribution expenses, and overall public welfare. The central government has long upheld subsidies as a key instrument in balancing the national economy.
However, a new policy has emerged that challenges the very logic of fuel subsidies—the motor vehicle fuel tax (PBBKB) implemented by the Jakarta provincial government. In simple terms, this tax raises the price of already subsidised fuel, meaning that citizens who were supposed to benefit from subsidies are now paying more. But if fuel subsidies exist to help the people, why are they still being taxed additionally? Is this not akin to providing financial aid only to take part of it back through taxation?
Yes, the Jakarta Provincial Government has established a fuel purchase tax or Motor Vehicle Fuel Tax (PBBKB) at 10%, as stipulated in Regional Regulation (Perda) No. 1 of 2024. However, Jakarta Governor Pramono Anung has stated that this policy is not yet in effect and remains under further discussion. There is also a proposal to reduce the tax rate to 5% for private vehicles and 2% for public transportation, which would be formalised through a Governor Regulation (Pergub).
The Motor Vehicle Fuel Tax (PBBKB) imposed by the Jakarta provincial government applies to all types of fuel, whether subsidised or non-subsidised. This means that every fuel purchase in Jakarta will be subject to this tax, including fuel that has already received government subsidies.
The proposed fuel tax in Jakarta could lead to various consequences affecting both individuals and businesses. Economically, an increase in fuel prices may contribute to rising transportation costs, which could subsequently drive up the overall price of goods and services. As businesses face higher operational expenses, they may pass these costs onto consumers, potentially leading to inflation. However, the revenue generated from this tax could be beneficial for government projects, particularly in infrastructure development and environmental initiatives aimed at improving public transportation and reducing carbon emissions.
For consumers, the tax could place additional financial strain, particularly on lower-income households that rely on personal vehicles for daily commuting. The increased cost of fuel might push individuals to reconsider their transportation choices, leading to a potential shift toward public transportation as a more affordable alternative. Businesses involved in logistics, delivery services, and transportation may also experience increased expenses, which could impact their profitability and even influence employment rates in certain sectors.
From an environmental standpoint, the higher fuel tax may discourage excessive fuel consumption, leading to reduced emissions and a more sustainable approach to energy use. This could further encourage individuals and businesses to explore electric vehicles or other alternative energy sources as a means to mitigate fuel expenses in the long run.
As the proposed tax rates are still under discussion, adjustments—such as reducing the tax to 5% for private vehicles and 2% for public transportation—might help balance the economic impact while still generating necessary revenue for government initiatives. The ultimate effects of the policy will depend on how it is implemented and whether appropriate measures are introduced to minimise financial burdens on consumers and businesses.
Now, let's break it down by examining the policy’s potential economic and social impacts.
The fuel tax will increase fuel prices, leading to higher transportation costs for individuals and businesses. This could have a ripple effect on the cost of goods and services, as companies factor in rising logistics expenses. Lower-income households, which often rely on motorcycles or older vehicles, will likely feel the most financial pressure. Businesses operating in logistics, ride-hailing, and public transportation may also face increased costs, potentially affecting consumer prices or profit margins.
The fuel tax policy in Jakarta could have notable effects on inflation and local economic growth.
Inflation refers to the increase in the general price level of goods and services over time. The fuel tax may raise the cost of transportation, which could result in higher prices for essential goods and services due to increased logistics expenses. Businesses that rely on transportation—such as retail, food distribution, and manufacturing—could adjust their pricing to compensate for these rising costs, thus contributing to inflationary pressures in Jakarta.
If fuel prices rise significantly, households will need to allocate more of their income toward transportation and energy costs, which could reduce their purchasing power. This, in turn, might lower consumer spending on non-essential items, potentially slowing overall economic activity. However, the actual inflation impact will depend on factors such as how businesses respond, whether alternative energy sources become more widely available, and whether the government introduces measures to control inflation.
Economic growth is driven by business expansion, consumer spending, and investment. A higher tax on fuel could discourage spending among both consumers and businesses, potentially slowing economic growth in the short term. Small and medium enterprises (SMEs), particularly those that rely on fuel-intensive operations such as logistics, transportation, and deliveries, may experience higher operational costs, which could impact their profitability and ability to expand. Since Jakarta plays a dominant role in Indonesia’s economy, the proposed fuel tax could have broader impacts on aggregate inflation, economic growth, and the overall economy.
Jakarta contributes significantly to national economic activity, especially in trade, services, and manufacturing. The rise in fuel prices due to the tax could lead to higher costs for goods and services at the national level, as transportation and distribution expenses increase. Sectors that rely heavily on mobility, such as logistics, e-commerce, and production, would likely experience a rise in operational costs, which could contribute to overall inflation.
If fuel prices rise sharply, there could be a spillover effect, where inflationary pressures in Jakarta spread to other regions. For example, goods produced or transported from Jakarta to other provinces would become more expensive, leading to increased costs of essential products across Indonesia.
National economic growth depends on consumer spending, business expansion, and investments. A fuel tax may reduce purchasing power, as households allocate more of their budget to transportation and energy costs. If consumer demand declines, businesses may experience slower growth, which could affect production levels and employment opportunities.
Most of the fuel consumed by Jakarta residents is subsidised fuel, while non-subsidised fuel is only used by a small portion of the population. This fuel tax policy has the potential to reduce the effectiveness of the fuel subsidy, as citizens who already receive subsidies will still have to pay additional taxes when purchasing fuel.
The purpose of fuel subsidies is to assist lower-income groups in affording fuel at a reasonable price. However, with the introduction of this tax, the cost of subsidised fuel will increase slightly, which could reduce the benefits of the subsidy for those who rely on it the most. Additionally, this tax may reduce people's purchasing power, especially for those who depend on private vehicles for daily commuting.
On the other hand, the government argues that this tax could increase regional revenue and be used for developing infrastructure and public transportation. If the tax revenue is truly allocated to improve public transit services, in the long run, this policy might help reduce reliance on subsidised fuel and encourage more efficient transportation usage.
However, the key challenge is ensuring that this tax does not excessively burden citizens, particularly those who depend on subsidised fuel. Without accompanying measures like additional compensation or targeted subsidies, this policy may contradict the original goal of fuel subsidies.
The fuel tax policy implemented by the Jakarta provincial government indeed appears to contradict the primary goal of the national fuel subsidy policy. The central government provides fuel subsidies to maintain affordable fuel prices, particularly for lower-income groups, while this tax adds an extra financial burden on consumers, including those already benefiting from subsidies.
The central government established fuel subsidies to protect citizens’ purchasing power and stabilise inflation, especially during economic uncertainties. However, with this regional fuel tax in Jakarta, those who were supposed to benefit from subsidised fuel will still have to pay more, reducing the effectiveness of the subsidy. Essentially, a policy meant to help citizens ends up being eroded by local taxation.
Furthermore, the national fuel subsidy policy is part of a broader economic stabilisation strategy, as lower fuel prices help control transportation, production, and distribution costs nationwide. The regional fuel tax could increase inflation, especially for goods and services dependent on fuel-based transport.
If this tax is imposed without proper compensation measures, the fuel subsidy loses its effectiveness as an economic safety net for citizens. Potential consequences include:
- Additional financial burden on the public – Subsidised fuel will still become more expensive, making the subsidy less beneficial.
- Fiscal imbalance – The central government provides subsidies, but fuel tax revenues flow into Jakarta’s regional budget, creating inefficiencies in national and regional fiscal policies.
- Risk of increased inflation – Higher fuel prices due to taxation could indirectly raise the cost of goods and services across Indonesia.
The impact of Jakarta’s fuel tax policy could become too severe, particularly in terms of economic strain, inflation, social unrest, and business disruption.
If the fuel tax significantly raises transportation costs, it could directly reduce consumer purchasing power. Since many Jakarta residents rely on subsidised fuel, an additional tax—even if set at 5%—may force households to cut spending on non-essential goods and services. If the tax raises overall living costs, economic activity could contract, particularly in small businesses and service sectors that depend on local consumer demand.
If lower-income households struggle to afford fuel, they may rely more on inefficient transport options, further reducing productivity and mobility. This could slow the growth of Jakarta’s economy, affecting employment rates and business expansion.
One critical economic risk is inflation acceleration beyond sustainable levels. Fuel price hikes often trigger cost-push inflation, where transportation, logistics, and manufacturing increase their prices to offset the higher operational costs. This would create a chain reaction, causing price hikes in essential commodities—such as food and household goods—since most of these rely on fuel-powered distribution systems.
If inflation rises too rapidly, Jakarta’s residents may face declining real wages, which would weaken economic confidence and lead to spending cutbacks. At this point, government intervention might be necessary to contain further inflationary risks.
If public frustration grows over higher costs with little benefit, widespread social dissatisfaction could emerge. There may be protests from consumer advocacy groups, small businesses, and public transport users. If transportation expenses become unbearable, individuals reliant on fuel for daily commutes—including taxi drivers, ride-hailing service providers, and logistics workers—could stage strikes or demonstrations.
Jakarta has experienced strong public opposition to policies affecting fuel prices in the past, and if this tax is perceived as unfair, there could be political pressure on government officials to modify or repeal it.
As operational costs rise, some companies might reconsider investment expansion, especially in transport-heavy sectors like logistics, retail, and manufacturing. If fuel expenses reduce profit margins, small businesses could scale back operations, and large corporations might relocate their supply chains to minimise financial impact.
In the worst-case scenario, businesses struggling with higher costs might downsize, leading to job losses and an overall decline in business activity. If key industries experience reduced profitability, Jakarta could lose its economic competitiveness, prompting government revisions or interventions.
Should the fuel tax policy be reconsidered?
Based on these impacts, the fuel tax policy should be reevaluated or revised, particularly to avoid direct contradictions with the national fuel subsidy program. If Jakarta’s government insists on implementing this tax, mitigation strategies such as lower tax rates, compensation for lower-income citizens, or allocating tax revenue to public transport subsidies could help reduce its negative effects.
The best approach is to harmonise regional and national policies so that the subsidy remains effective without being undermined by additional taxation.
