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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 7: Combining Expenditure Assignment, Revenue Assignment and Grant Design in Indonesia’s Fiscal Decentralization

Machfud Sidik and K Kadjatmiko

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


7. Combining expenditure assignment, revenue assignment and grant design in Indonesia’s fiscal decentralization Machfud Sidik and Kadjatmiko INTRODUCTION Indonesia has embarked on an ambitious program of fiscal decentralization. The effort has its genesis in two laws, both promulgated in May 1999, one on administrative matters (Law No. 22/1999) and the other concerning fiscal and finance issues (Law No. 25/1999). These two laws have been followed by a large number of implementing regulations and ministerial decrees. As a result of this legislation, provincial and local governments have assumed major new responsibilities, starting in January 2001. These laws have transformed intergovernmental relations in Indonesia. Substantial service functions for provinces have been outlined in a recently issued government regulation. Local (e.g. kabupaten and kota) government responsibilities have been only vaguely defined via a ‘negative list’ of duties, but are nonetheless considerable. Kabupatens and kotas have become responsible for all public services that the central and provincial governments do not deliver, at least in 11 important areas: public works, health, education and culture, agriculture, communications, industry and trade, capital investment, environment, land, cooperatives and labor. However, despite the new expenditure responsibilities, regional governments have not been awarded new authority over any major tax bases. Kabupatens and kotas are now allowed to create their own taxes through local by-laws, given the requirement that these taxes satisfy a number of ‘good’ tax criteria and receive central government approval. The system of intergovernmental transfers has also been significantly restructured and expanded. Regional governments now gain...

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