Global Shock Transmission to the Budget Deficit: The Role of Fuel Subsidies as Fiscal Shock Absorbers
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Budget Deficit, Error Correction Model, Fiscal Sustainability, Fuel Subsidy, Global Shocks, State Treasury
Abstract
Research Originality – This study contributes to the fiscal sustainability literature by examining the incomplete transmission of global shocks to Indonesia’s budget deficit. While much of the existing literature emphasizes inflationary effects, this paper shifts the focus to the global financial cycle and positions fuel subsidies as a mediating channel between international shocks and fiscal outcomes.
Research Objectives – This study's primary objective is to find out how the global factors affect the budget deficit through oil subsidies and also to evaluate the speed and effectiveness of fiscal adjustment to keep the fiscal deficit within statutory limits.
Research Methods – This study uses the Error Correction Model (ECM) and time-series data from 1990 to 2025. The study also contains various variables that relate to fiscal deficit, fuel subsidy, and global shocks such as global oil prices, exchange rates, and the volatility index. The ECM model is a model that is useful for capturing long-term equilibrium and short-run dynamics. The model focuses on the Error Correction Term to assess the responsiveness of fiscal policy to external imbalances.
Empirical Results – The results of the study show that there is a long-term cointegration relationship between fiscal deficit, fuel subsidy, and global shocks. It revealed that fuel subsidies function as a shock absorber to protect the government's fiscal position and the country's economy, such as people's purchasing power.
Implications – This study suggests that fiscal authorities should strengthen cash buffers, such as Budget Surplus (Saldo Anggaran Lebih, SAL), and focus on how to implement targeted digital subsidies to maintain the 3% GDP deficit limit to ensure social protection against external shocks.
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