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Indonesia’s fiscal decentralization and its effect on provincial public finances

PFM, Vol. 15 No. 2, (2015)

Recent studies of fiscal policy in Indonesia have looked at overall fiscal performance or the effect of decentralization on local governments but neglected the specific situation of provincial governments. In this paper we analyze the provinces’ position in the Indonesian fiscal framework after decentralization and discuss their fiscal autonomy as a separate level of government. We conduct this analysis by looking at five parameters: 1) fiscal health, 2) revenue and expenditure stability, 3) effectiveness in budget management, 4) fiscal inde-pendence, and 5) fiscal disparity. Almost 15 years into decentralization provinces show overall healthy fiscal positions with regular surpluses. However, we also find that revenue and expenditure vary strongly across years, provinces do a poor job in implementing planned budgets, they rely on the central government for more than half their revenues and there are great fiscal disparities across the provinces. We conclude by suggesting a number of measures provincial and national policymakers can take to improve the situation.

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