Thammasat University students interested in ASEAN studies, Indonesia, economics, business, sociology, and related subjects may find it useful to participate in a free 13 December Zoom webinar on Fiscal Decentralization in Indonesia: Historical Context, Milestone, and Way Forward.

The event, on Friday, 13 December 2024 at 9am Bangkok time, is presented by ISEAS – Yusof Ishak Institute, Singapore.

The TU Library collection includes books about different aspects of fiscal decentralization in Indonesia.

Students are welcome to register for the event at this link:

https://us06web.zoom.us/webinar/register/7617320930682/WN_AWncOw37SaOB1G-7R8xYVA#/registration

The event website explains:

Fiscal decentralization has emerged as a key component of governance reforms since the 1980s. It transferred political, administrative, and fiscal responsibilities from central to local governments often in response to economic crises and growing public demands for democratic accountability.

Over the past two decades, fiscal decentralization has profoundly reshaped Indonesia’s governance structure. While it has contributed to economic growth, poverty reduction and better public services, new challenges have emerged alongside calls for reforms to adapt to the evolving needs of the regions. This seminar will provide an in-depth analysis of Indonesia’s fiscal decentralization, highlighting key achievements, current challenges and future strategies to ensure sustained progress.

About the Speaker

Dr. Luky Alfirman is the Director General of Fiscal Balance, Ministry of Finance (MOF) of the Republic of Indonesia. He manages the intergovernmental fiscal transfers to subnational governments. […]

Last year, a blog on the website of the World Bank observed:

• Subnational revenue mobilization: A critical issue for the success of fiscal decentralization in Indonesia

Indonesia’s 2001 Big Bang of fiscal decentralization transferred significant spending responsibilities to subnational governments (SNGs). This led to a high share of SNG spending (both provincial and district) of around 50 percent of total government expenditure, excluding subsidies, interest payments, and transfers.

SNGs rely primarily on central government (CG) transfers to finance their spending, making them their largest revenue source. However, SNG reliance on CG transfers has steadily decreased over the last two decades due to successive rounds of fiscal decentralization. CG transfers accounted for 82 percent of SNG revenue in 2001 which reduced to 48 percent in 2020.

Stepping up SNG revenue mobilization is important as it achieves two objectives. First, it allows SNGs more fiscal independence. A heavy reliance on CG transfers diminishes incentives for prudent local budget execution, weakening the fiscal contract between government and people. Second, better tax policy and compliance at the subnational level can help close Indonesia’s overall tax gap, which, we estimated at 6 percent of GDP for 2018.

Over the last decade, the share of own source revenue (OSR) in total revenue for the provinces has remained high and stable (graph 2). However, when it comes to districts, the situation is different. While fiscal independence has slowly improved, thanks to increasing OSR in both nominal terms as well as a share of local revenues (graph 3), districts still have the potential to improve OSR collection.

This progress in districts till now can be partly attributed to the central government’s strong commitment to fiscal decentralization, which it has accomplished by giving local governments control over significant income sources, including property tax. Decentralization of these tax bases includes giving SNGs the freedom to determine tax rates below a CG-specified ceiling and the power to administer these taxes.

Additionally, the new Law 1/2022 takes several important steps to further improve district revenue mobilization. These include an increase in the ceiling tax rate for the property tax and the simplification of several consumption-based taxes into a common sales tax.

World Bank Support

While the reforms are steps in the right direction, there is still plenty of room to further enhance district revenue mobilization. To address the revenue mobilization challenge, the World Bank has partnered with the Ministry of Home Affairs, the Ministry of Finance, and a few district governments in Indonesia to provide technical assistance on revenue administration in these districts.  This activity is broadly divided into two steps:

District tax diagnostics: Conducting a revenue administration baseline diagnostic to identify constraints to district revenue administration in the respective districts.

Technical assistance to pilot districts: Working closely with the district government to provide technical advice on ways to improve revenue mobilization, based on the diagnostic work.

The idea is to jointly work with partners to, first, provide good, micro-founded evidence of revenue mobilization constraints, such as informality and tax policy distortions.  This evidence will then form the basis for a technical assistance program to address important constraints. The work will generate valuable lessons for all important stakeholders which will help with the scalability of reforms for districts across Indonesia. This in turn, will help address the overall revenue mobilization challenge in Indonesia.

Also last year, on the website of The Local Public Sector Alliance (LPSA) which promotes inclusive, equitable societies and sustainable global development by enhancing the understanding of decentralization and localization as complex, cross-cutting and multi-stakeholder reforms, an article was posted:

Two Decades of Fiscal Decentralization Implementation in Indonesia

Fiscal decentralization in Indonesia has come a long way in the past two decades. The milestone for implementing fiscal decentralization in Indonesia began with the establishment of Law Number 22 of 1999 on Regional Government and Law Number 25 of 1999 on Financial Balance between Central and Regional Governments. The enactment of the two laws was marked as the “Big Bang” of fiscal decentralization in Indonesia, which started a new era of regional autonomy by delegating regions with the authority to manage their fiscal budgets, both in terms of revenues and expenditures. Fiscal decentralization in Indonesia places emphasis on granting local governments discretion on expenditures in accordance with regional needs and priorities, while the revenue is still largely controlled by the central government to ensure national and state integrity. Nevertheless, the regional government has the authority to explore sources of local own-source revenue as regulated by law.

A recent book, Two Decades of Fiscal Decentralization Implementation in Indonesia, provides a comprehensive overview of the fiscal decentralization journey in Indonesia from 2001 to 2020, covering: the management of transfer funds, regional budget management, central and regional expenditure harmonization, inter-regional fiscal cooperation, and impact analysis of fiscal decentralization on economic, social, and public service development achievements. In addition, the various policies serve as important lessons on continually making efforts toward equalizing the distribution of general welfare throughout Indonesia.

The evaluation of fiscal decentralization implementation in Indonesia over the past two decades (2001-2020) resulted in many recommendations and several policy suggestions. The main recommendation is that using fiscal decentralization as a fiscal instrument to improve the quality of public services and improve people’s welfare must be continuously strengthened by improving the quality of fiscal relations between the central government and local governments. Improvements can be made through more transparent and accountable practices to increase the effectiveness and efficiency of fiscal resource management between the central government and the regions. […]

(All images courtesy of Wikimedia Commons)