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Fiscal Decentralization in Indonesia: Status and Directions for Reform Bert Hofman Lead Economist, World Bank
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Indonesia’s Fiscal Decentralization zBig Bang Decentralization zHigh Dependency on Grants zLimited Own Tax Base zLarge Fiscal Disparities
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Big jump in spending share
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Largely financed by grants
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More revenues are shared
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And some own tax base
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More than enough on aggregate
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And development spending increased
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But some are more equal than others Rp./Capita
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The DAU is hardly helping
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Although it reduces variation in revenues
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The center still spends a lot
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The center spends a lot on local functions
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Local government has its problems zHigh share of spending on wages zLots of legal and illegal taxation zWeak financial management and accountability zWeak coordination with the province
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Directions for reforms “Rich regions must fend for themselves, poor must be assisted by the center” Central government should spend less on local functions Resources can be devolved though Own tax base for regions DAK DAU
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Directions for reforms Own taxes could be: Property tax (center can still administer) Business tax (Hotel and restaurant tax already) Personal Income Tax Surcharge (Opcen)
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Conditions for reforms Better financial management in regions More clarity on functions/obligations Restrictions on what taxes regions can raise (“Closed list” in Law 34) Civil service reform More equalizing DAU
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