As a decentralized and multi-tired of government, lower-level governments in Indonesia play major role in delivering basic services ranged from education, health, and to an extent local infrastructures such as roads, drinking water infrastructure, and sanitation. For the year 2023, from total general government spending of 3,476 trillion IDR, around 38.4% is the spending by lower-level government, in which as an aggregate, share of local government spending is higher than the provincial level of government (Ministry of Finance, 2024).
The funding of local public goods and services can come from intergovernmental transfers as well as local government own-source revenues. For most local governments, majority of the transfers come from in the form of general equalization grant. In the new Law on Central and Local Financial Arrangement, Law 1 2022, the pool fund for general equalization grant which is previously mandated in the Law 33 2004, is not directly stated in this new Law. Since 2017, the growth of overall intergovernmental transfers from central government is below 10% and there is a reduction in intergovernmental transfers during Pandemic COVID-19 in year 2020 (Ministry of Finance, 2021). In the event of limited fiscal respurces at the central level, there could be a risk of delining intergovernmental transfers allocation.
Though policies on decentralization in Indonesia leans toward expenditures decentralization, devolution as well as discretion on local government revenues have evolved. Therefore, discussion of local revenue autonomy is important on how local government manage and able to improve its local resource mobilization through its own-source revenues and specifically improvement in its local taxes revenues. This brief shows over a decade profiles on local government revenues from intergovernmental transfers and its own-source revenues. Specifically on local taxes revenues, this brief review collection performance on local taxes revenues in this year of 2024.
Figure 1 shows the share of own-source revenues across local governments during period of 2013-2023. On average, over the last ten years, there is an increase in the share of own-source revenues, from 5.7% in 2013 to 9.9% in 2023. A peak of increase in the share of own-source revenues in 2017 may also be contributed from low growth of intergovernmental transfers allocation in that year. To note, overall intergovernmental transfers allocation to lower level governments in 2017 grew only 6.44% (Ministry of Finance, 2017), and in this case the transfers that are allocated to local governments have declined.
There are large variation across local governments on their ability to collect and have an adequate base in terms of own-source revenues. The 90th percentile referring to local governments with the highest share of own source revenues, have relatively performed better on local own-source collection with an average of own source revenue share reached 25.4% in 2023. This group of local governments are mostly urban local governments and around 52% of it are local governments in Java region. The 90th percentile group has been relatively the same implying that there is not much of catching-up from other local governments in terms of mobilizing own source revenues.
Figure 1
Intergovernmental transfers are still the dominant source of revenues for local government in Indonesia. The high reliance from central government allocation of the transfers is shown in Figure 2. Despite the declining trend in share of the transfers, the recent years are characterized by an increassing share of the transfers across all deciles of local governments. The drop in the share of intergovernmental transfers in 2017 is a result of reduction of the transfers to local government and as central government allocated higher size of transfers to village level. In 2017, the allocation of village fund had increased of more than 27% (Ministry of Finance, 2017).
The 90th percentile of local governments with 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 economi activities hamper economic development in these areas. The dominance of revenue sources from the transfers may lead to a condition of soft budget constraint. Given the costs of the spending does not correspond to revenues sources, for local goverments that have very high reliance on intergovernmental transfers, these local governments may be more prone from inefficient spending and or low effort in its own-source revenues specifically on local taxes collection. As also shown in Figure 2, the average of 10th percentile of local governments with lowest share of intergovernmental transfers is still high which is 74.4% in year 2023.
Figure 2
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 this revenue sources as in the case of taxes collection. In terms of these local taxes revenues, Figure 3 shows the share of local governments taxes revenues to GRDP which implicitly informed effective local taxes rates.
The government of Indonesia adopt a closed list on type of local taxes that can be levied by local governments. This policy of closed list local taxes is adopted since Law 28 2009 enacted on local government taxes which have also been preserved in new Law 1 2022. From Figure 3, overall local government taxes revenues has yet reached 1% of GDP, and this tax ratio is relatively low in comparison to other developing countries (Bahl et al 2022).
Figure 3
