Indonesia's Fiscal Decentralization and its Effect on Provincial Public Finances 1

Abstract

Recent studies of fiscal policy in Indonesia have looked at overall fiscal performance or the effect of decentralization on local governments but neglected the specific situation of provincial governments. In this paper we analyze the provinces’ position in the Indonesian fiscal framework after decentralization and discuss their fiscal autonomy as a separate level of government. We conduct this analysis by looking at five parameters: 1) fiscal health, 2) revenue and expenditure stability, 3) effectiveness in budget management, 4) fiscal independence, and 5) fiscal disparity. Almost 15 years into decentralization provinces show overall healthy fiscal positions with regular surpluses. However, we also find that revenue and expenditure vary strongly across years, provinces do a poor job in implementing planned budgets, they rely on the central government for more than half their revenues and there are great fiscal disparities across the provinces. We conclude by suggesting a number of measures provincial and national policymakers can take to improve the situation.

Get full access to this article

View all access options for this article.

References

ADB (2013). Key Indicators for Asia and the Pacific 2013.

Agustina

C. D. R. D.

, Fengler

, & Schulze

G. G.

(2012) The regional effects of Indonesia's oil and gas policy: options for reform, Bulletin of Indonesian Economic Studies, 48(3):369–397, http://doi.org/10.1080/00074918.2012.728644.

Alm

, Aten

R. H.

, & Bahl

(2001) Can Indonesia Decentralise Successfully? Plans, Problems and Prospects, Bulletin of Indonesian Economic Studies, 37(1):83–102, http://doi.org/10.1080/000749101300046537.

Bahl

, & Wallace

(2005) Public Financing in Developing and Transition Countries. Public Budgeting & Finance, 25(4s): 83–98, http://doi.org/10.1111/j.1540–5850.2005.00005.x.

Blöndal

J. R.

, Hawkesworth

, & Choi

H.-D.

(2009) Budgeting in Indonesia, OECD Journal on Budgeting, 9(2):1–31.

Butt

, & Parsons

(2012) Reining in Regional Government - Local Taxes and Investment in Decentralised Indonesia, Sydney Law Review, 34(1):91–106.

Fadliya , & McLeod

R. H.

(2010) Fiscal Transfers to Regional Governments in Indonesia (Departmental Working Paper No. 2010–14). The Australian National University, Arndt-Corden Department of Economics. Retrieved from https://ideas.repec.org/p/pas/papers/2010-14.html.

Lewis

B. D.

, & Oosterman

(2009) The Impact of Decentralization of Sub-national Government Fiscal Slack in Indonesia. Public Budgeting & Finance, 29(2):27–47).

Seifert

(2015) The Politics of the Budget Process in the Indonesian Parliament (Dpr) (SSRN Scholarly Paper No. ID 2589972), Rochester, NY: Social Science Research Network. Retrieved from http://papers.ssrn.com/abstract=2589972.

10.

SEKNAS FITRA. (2012) Policy Recommendations on Revision of Regional Fiscal Balance Funding (Dana Perimbangan), Jakarta.

11.

Shah

, Qibthiyyah

, & Dita

(2012) General Purpose Central-provincial-local Transfers (DAU) in Indonesia. From Gap Filling to Ensuring Fair Access to Essential Public Services for All, Policy Research Working Paper, Jakarta.

12.

Thornton

, & Mati

(2007) Fiscal Institutions and the Relation between Central and Sub-National Government Fiscal Balances, Public Finance Review, 36(2): 243–254, http://doi.org/10.1177/1091142107308297.

13.

UNDP Indonesia. (2009) The Missing Link. The Province and its Role in Indonesia's Decentralisation.

14.

Venning

(2009) Impact of budget support on accountabilities at the local level in Indonesia. OECD Journal on Budgeting, 9(1), 1–29.

15.

World Bank. (2007) Spending for Development: Making the Most of Indonesia's New Opportunities Indonesia Public Expenditure Review 2007. Jakarta: World Bank.