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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...