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Reforming Intergovernmental Fiscal Relations and the Rebuilding of Indonesia

Reforming Intergovernmental Fiscal Relations and the Rebuilding of Indonesia

The ‘Big Bang’ Program and its Economic Consequences

Studies in Fiscal Federalism and State–local Finance series

Edited by James Alm, Jorge Martinez-Vazquez and Sri Mulyani Indrawati

Indonesia is currently facing some severe challenges, both in political affairs and in economic management. One of these challenges is the recently enacted decentralization program, now well underway, which promises to have some wide-ranging consequences. This edited volume presents original papers, written by a select group of widely recognized and distinguished scholars, that take a hard, objective look at the many effects of decentralization on economic and political issues in Indonesia.

Chapter 6: Local tax Revenue Mobilization in Indonesia’s Decentralizing Era

Robert A. Simanjuntak and B. Raksaka Mahi

Subjects: asian studies, asian development, asian economics, development studies, asian development, economics and finance, asian economics, public finance


Robert A. Simanjuntak and B. Raksaka Mahi INTRODUCTION One crucial element of any system of local government is the power to tax the local population in order to finance the provision of local services. Regional governments often regard the proportion of local taxes and charges in their total budget revenue as the main indicator of the degree of local autonomy they enjoy. The larger the taxing power, the larger the proportion of own-source revenue in the total budget, and the more autonomous they are. Nowadays many local government officials in Indonesia share this view. However, the local tax base in Indonesia has been unsatisfactory for many years; that is, it is not yielding sufficient revenue, or its incidence is perceived as unfair. The evidence presented in Tables 6.1 to 6.3 shows that during the 1990s, for the majority of the provinces, own-source revenue represented less than 30 percent of their total budgets. The situation had been even less satisfactory for districts/municipalities. The implementation of regional autonomy since January 1, 2001 has had practically no effect in this situation. (see Tables 6.1–6.3.) The local revenue problems can also be seen from the consolidated central and local governments budget. During the 1990s, regional governments raised only about 7 percent of total government revenues, which financed only about one-third of their expenditures. In the first year of regional autonomy implementation (2001), the situation was generally similar, with regional governments raising only about 8.29 percent of total government revenues, while their...

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