The saving will allow the government to double its spending on transportation, agriculture and public works, with 60% to be allocated to infrastructure.
The government will also focus on investment in oil and gas infrastructure and electricity throughout 2015.
Widodo also capped the amount of aid for diesel, falling in line with India and Malaysia in a bid to take advantage of falling oil prices and ween the country off subsidised fuel.
Indonesia began its subsidies following the first oil crisis in the 1970s and kept prices are less than 20c per litre until 2005, according to a World Bank report published last year.
The removal of the subsidy is not expected to be popular with the public which have protested price rises in the past.
“The challenge would be of course the response from the public, but I have confidence that if we communicate well, then they will understand,” Finance Minister Bambang Brodjonegoro told reporters.