Tim Dodd, Jakarta – After a year's pause for breath Indonesians are about to face another economic squeeze with tax hikes and subsidy cuts set to raise prices on basic goods as part of the Government's effort to prune its budget.

The price of electricity will go up by an average of nearly 30 percent on April 1, and fuel costs will rise shortly afterwards, probably by 20 percent, as the Government winds back its heavy subsidies. At the same time taxes will rise, including new excises on soft drinks, ties and cement, which will also pass through to consumer prices.

The Government's planning board believes the CPI could rise by more than 10 percent this year. Last year inflation was zero, but this followed 77 percent hyper-inflation in 1998.

The Indonesian Government has been forced into cutting its budget by the legacy of the economic crisis and decades of bad policy making in the Soeharto years. The bills are now coming in for the $130 billion bank rescue plan (interest payments are up by 45 percent in this year's budget) and a 17 percent rise in the public servants' salary costs – seen as essential to cut down on the rampant corruption caused by very low public sector pay.

Price rises are a volatile issue in Indonesia and subsidy cuts for electricity and petrol in May 1998 sparked riots which helped push The president Soeharto from office.

Indonesia's tiny socialist party, the People's Democratic Party, plans to protest against the price rises with a series of demonstrations. But other advocates for low-income earners see the price rises as responsible. "This is not popular but it is a better option than foreign debt," said Ms Wardah Hafidz, co-ordinator of the Urban Poor Consortium in Jakarta.

The electricity price rise will be structured to minimise the impact on the poor. Households with higher usage will be given a bigger price rise. The biggest burden will be borne by business. The price rise for industry will be between 54 percent and 76 percent.

Indonesia's budget situation is being assisted by the continuing high oil price. Although the high price raises the cost of the petrol subsidy, the Government makes a net gain because it wins more in extra taxes than is lost with a higher subsidy.