Fuel plays an important role in indonesia In line with the ongoing development, the consumption of fuei increases rapidly. Considering fuel as a sensitive· commodity, the government maintains the price of fuel at a very low price through subsidy. Later,
it is realized that this policy has some negative effects, i.e. inefficiency in fuel
consumption, pollution, discourage the search for alternative energy sources, etc. However. the urgency of revoking fuel subsidy comes from the pressure of state budget ?s condition. Experiencing massive budget deficit, the government plans 10 cut
its expenditure by reducing the subsidy. The subsidy reduction will cause the price of fuel to increase. While, we do not know the impact of the increase in fuel price on the economy.
In view of that, the objectives of this thesis are. first, to estimate the likely impact of increasing the price of fuel on aggregate output. employment, saving and income distribution. Second, to detennine appropriate policy that may reduce the negative impact resulting from increasing price of fueL
The methodology used in this thesis is computable general equilibrium (CGE), CGE
Has been selected because of its capability in describing interaction among sectors within economy. The advantage of using CGE models is that, one constructed, they yield a tractable tool for analyzing a wide range of possible policy changes. By using the CGE model, we do some scenarios of fuel price increase and investigate its impact on the economy
The simulation result shows that the policy of increasing fuel price can be used to strengthen government budgeL However, the impact on unemployment should be seriously taken into consideration. Given the more vital role played by HSDO compare with that of gasoline and IDO in the economy, the percentage of price increase in HSDO should be lower than the other if the government wants to soften
the burden to society.