As a decentralized and multi-tiered system of government, lower-level governments in Indonesia play major role in delivering basic services, ranging from education and health to local infrastructure projects such as roads, drinking water infrastructure, and sanitation. For the year 2023, out of a total general government spending of 3,476 trillion IDR, around 38.4% was spent by lower-level governments. In aggregate, the share of local government spending is higher than spending at the provincial level of government (Ministry of Finance, 2024a).
The funding of local public goods and services can come from both intergovernmental transfers and local governments’ own-source revenues. For most local governments, the majority of these transfers come in the form of general equalization grants. Under the new Law on Central and Local Financial Arrangement, Law 1 2022, the pool fund for general equalization grants, previously mandated in the Law 33 2004, is no longer directly stated. Since 2017, the growth of overall intergovernmental transfers from central governments is below 10%, and there was a reduction in intergovernmental transfers during the COVID-19 Pandemic in 2020 (Ministry of Finance, 2021). Should there be limited fiscal respurces at the central level in the future, there could be a risk of declining intergovernmental transfer allocations.
Although Indonesia’s policies on decentralization have primarily focused on expenditure decentralization, there has been progress in both devolution and granting local governments greater fiscal discretion. Therefore, the discussion of local revenue autonomy is important in understanding how local governments manage and are able to improve their local resource mobilization through own-source revenues, specifically by improvement in their local tax revenues. This policy brief aims to examine trends in local government revenues by assessing: - how local revenue patterns have evolved over time - revenue collection capacity – referring to the ability of local governments to generate and collect local own source revenues effectively over time - potential reforms to enhance local revenue mobilization. A specific focus of this brief is the review of local tax revenue collection performance in 2024. To note, we limit discussion on own-source revenues and local taxes at the third-tier level of government, referring to local governments: cities and municipalities in Indonesia.
Figure 1 shows the share of own-source revenues across local governments during 2013-2023. On average, over this period, there is an increase in the share of own-source revenues, from 5.7% in 2013 to 9.9% in 2023. The peak in the increase in the share of own-source revenues in 2017 may be the result from the low growth of intergovernmental transfer allocations in that year. To note, overall intergovernmental transfer allocations to lower level governments in 2017 grew only 6.44% (Ministry of Finance, 2017), meaning that the transfers that are allocated to local governments have declined.
Figure 1
There is large variation across local governments in their ability to collect of own-source revenues and maintain an adequate revenue base. Local governments in the 90th percentile – referring to local governments with the highest share of own source revenues – have stronger performance in local own-source collection: starting from 15.3% in 2013, they reached an average of own source revenue share of 25.4% in 2023. This group of local governments consists mostly of urban local governments, around 52% are local governments in the Java region. The 90th percentile group has been relatively stable over time, implying that there is not much of catching-up from other local governments in terms of mobilizing own source revenues. These local government own-source revenues consist of local taxes revenues, revenues from fees or charges, profit from local SOEs, and other legal own-source revenues.
Intergovernmental transfers are still the dominant source of revenues for local governments in Indonesia. The high reliance on central government allocations is shown in Figure 2. Despite the declining trend in the share of these transfers over the whole period, the most recent years are characterized by an increased share of transfers across all deciles of local governments. The drop in the share of intergovernmental transfers in 2017 is a result of the reduction of transfers to local governments, as the central government allocated a higher size of transfers at the village level. In 2017, the allocation of village fund had increased more than 27% (Ministry of Finance, 2017).
Figure 2
The 90th percentile –local governments with the highest share of intergovernmental transfers – are mostly local governments in eastern Indonesia and some of them are small-islands. A relatively low scale economy and limited economic activity hamper economic development in these areas. The dominance of revenue sources from the transfers may lead to a condition of soft budget constraint. Given that the cost of the spending does not correspond to revenue sources, local goverments that have very high reliance on intergovernmental transfers may be more prone to inefficient spending and/or low effort in its own-source revenue collection, specifically local taxes. Meanwhile, as also shown in Figure 2, the share of the transfers for the 10th percentile of local governments have also increased from its lowest period in year 2017 to 74.4%, on average, in 2023. soft budget constraintThe 90th percentile –local governments with the highest share of intergovernmental transfers – are mostly local governments in eastern Indonesia and some of them are small-islands. A relatively low scale economy and limited economic activity hamper economic development in these areas. The dominance of revenue sources from the transfers may lead to a condition of soft budget constraint. Given that the cost of the spending does not correspond to revenue sources, local goverments that have very high reliance on intergovernmental transfers may be more prone to inefficient spending and/or low effort in its own-source revenue collection, specifically local taxes. Meanwhile, as also shown in Figure 2, the share of the transfers for the 10th percentile of local governments have also increased from its lowest period in year 2017 to 74.4%, on average, in 2023.
An increasing share of intergovernmental transfers is a concern in addition to the fragmented intergovernmental transfers across level of governments, including village administration level. A relatively low share of own-source revenues could be a disincentive for mobilizing revenue sources as in the case of taxes collection.
The government of Indonesia adopts a closed list on the type of local taxes that can be levied by local governments. This policy of closed list local taxes has been adopted with the enactment of Law 28 2009 on local government taxes and it has been preserved in new Law 1 2022. Figure 3 shows that average local government tax revenues have not yet reached 1% of GRDP. Within the 90th percentile of local governments, in 2023, only 18 local governments have a tax ratio more than 1% of GRDP, of which only four are local governments outside Java and Bali-Nusa islands. Most of these local governments are in the regions with a dominant tourism sector as in the case of local governments in Bali - Nusa islands, DI Yogyakarta, and urban local governments in the agglomeration or periphery of DKI Jakarta. Overall, local government tax revenues have not yet reached 1% of GDP. This tax ratio is relatively low in comparison to other developing countries (Bahl et al 2022). Thus with an average local tax ratio of only 0.26% as shown in Figure 3, most of local governments in Indonesia are highly underperforming in terms of local taxes collection.
Figure 3
The share of local taxes revenues to GRDP has slightly droped in 2020. On average, the share of local taxes revenues has a slightly increasing trend though it tends to fluctuate, as is especially shown by the 90th percentile of local governments with the highest share tax to GRDP ratio. Overall, although the COVID-19 pandemic has slowed down economic activities, the impact on local government tax revenues has been relatively moderate (Qibthiyyah & Desdiani, 2022). During the year of the pandemic, there were mobility restrictions adopted by some provinces and/or local governments, especially in the Java region, however it has not much impacted the local tax base. To note, major local tax revenues come from property related taxes for urban areas and local taxes on retail (household) electricity consumption in the case of non-urban areas, and both of these taxes as a source of revenue are relatively stable.
The year 2024 was an election year in which elections were held at the same time across all local governments. In terms of local taxes policies, that year 2024 may also be a starting year in which local governments adopted new policies on local taxes as have been stated in Law 1 2022. As with any changes of policies, there are administrative costs related to the implementation and regulatory adoption at the local level. Also, for the taxpayers, the changing policies on local taxes may or may not affect its compliance depending on the design of local taxes policies and its administration that could vary across local governments.
In terms of growth, as shown in Figure 4, local tax revenues in the first semester exhibited higher year on year (henceforth YoY) growth rates, mostly ranging between 4% and 6%. From July to November, the growth rate remained positive but showed a downward trend, indicating a slowdown in collection. By december, the YoY growth rate became negative at -0.65%, signaling a contraction in taxes revenues compared to the same period in the previous year.
Overall, while local tax collection showed a steady nominal increase, the fluctuating and ultimately declining growth rate towards the end of the year may suggest potential economic slowdowns or changes in tax policies affecting revenue generation. This decline of local tax revenues is unexpected, especially local elections were held in all regions in 2024 and generally, economic activities across region expanded.
 Figure 4
The following Figure 5 shows local tax collection across local governments, measured as share of realized tax revenues to budget. By the end of 2024, there were 350 local governments that experienced tax revenue shortfalls, which is almost 70% of observed local governments. In terms of the severity of the shortfall, Figure 5 shows that local tax revenue shortfalls that are more than 50% from the target of collection stated in budget occurred in 83 local governments, which is 16.7% of all observed local governments. This high number of local governments with local taxes revenue shortfalls signals to some extent underperforming of local government tax collection.
 Figure 5
In contrast, there are also local governments whose local tax collection highly exceeded the budget. However, it is still in question whether it reflects good performance of collection given the large differences to the stated budget, and thus can be caused by a relatively low target of local taxes revenues stated in the budget. To note, most of these local governments have a small budget size and respectively have low local taxes revenues in absolute value.
Domestic resource mobilization for the case of local governments in Indonesia have been slowly improved for few local governments, which are mostly urban areas. The 90th percentile of local governments, have an average of own source revenue share reached 25.4% in 2023 from 15.3% in 2013. During the last ten years, intergovernmental transfer allocations have declined for most local governments in Indonesia, but has increased again after the pandemic. This aligns with a relatively flat trend in terms of share of local own source revenues for the 10th percentile of local governments.
Of these local own-source revenues, most of the revenues come from local taxes, and in terms of local tax capacity, there is a latent issue of a low local government tax ratio. There is a very large gap between the statutory local tax rate and the local government tax ratio, which in the year 2023 was still only 0.26% of GRDP for the average of of local governments.
For the year 2024, around 70% of local governments experienced a shortfall in tax collection, implying that these local government tax collections were below the target stated in their respective budget. Observing month to month taxes revenues realization, there is a declining YoY growth after mid year and there was a negative YoY growth of local taxes in December 2024.
In the context of local governments, the local tax revenue mobilization has not been optimal and the challenges to improve tax collection are likely to be different given the diverse local fiscal characteristics among local governments in Indonesia. For some local governments, there may also be a problem of lacking credible estimates in terms of setting the revenues target.
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Law 33 2004 on Intergovernmental Transfers. Government of Indonesia.
Law 28 2009 on Provinces and Local Government Taxes and Charges. Government of Indonesia.
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https://djpb.kemenkeu.go.id/portal/publikasi/data/gfs/LKPK/LKPK_2023.pdf
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https://fiskal.kemenkeu.go.id/files/buku/file/1661139200_buku_dua_dekade_desentralisasi_fiskal.pdf
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