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.

Policy suggestions to improve the quality of fiscal relations between the central government and
sub-national governments included:

  1. Improving transfer fund management to minimize financial capacity disparities between levels of government (vertical) and between regions (horizontal) and encourage improvements in the quality of regional expenditure.
  2. Second, future fiscal decentralization should strengthen local taxing power while continuing to encourage investment, ease doing business, and contribute positively to economic development in the regions.
  3. Third, regional expenditures, which personnel expenditures have dominated thus far, should be directed toward optimal public service delivery and reallocated to productive expenditures that can benefit a multiplier effect on the economy.
  4. Fourth, sub-national public financial management needs to be improved, particularly in terms of the planning stage.
  5. Fifth, the harmonization of fiscal policy between the central government and regional governments needs to increase to accelerate the realization of development objectives.
  6. Sixth, for the above-mentioned policies, every stage of policy formulation—from planning to implementation, supervision, monitoring, and evaluation—must be carried out in a sustainable manner.

The book Two Decades of Fiscal Decentralization Implementation in Indonesia is available for download (in English and Bahasa Indonesia) on the website for the Fiscal Policy Agency (part of the Ministry of Finance of Indonesia).