Central-local fiscal relations in Indonesia
Bawazier, Fuad (Adv. Professor Wallace E. Oates), Professor Wallace E. Oates
-
The dissertation examines empirically whether or not Indonesian central-local fiscal relations are efficient and equitable. The dissertation deals with locally raised revenues and intergovernmental grants and presents proposed reforms of local taxation and of the grant system.
The study describes the characteristics of each local tax, examines the role of local taxes in local budgets, and also examines the growth in local taxes over the period of 1978/79 to 1983/84.
The study shows that most local taxes need to be abolished. They are inefficient, inequitable, and unproductive. A tax on fuel consumption is proposed because it satisfies all the basic criteria for a desirable tax. This tax would reduce the fuel price distortion created by the fuel price subsidy.
The variations in total and in per capita taxes as well as in tax effort ratios among localities are accounted for by variations in local revenue potential and local revenue efforts. The variations in the tax and in the tax effort ratio are analyzed using socioeconomic variables such as per capita income, population density, urban rate,
length of roads, and the percentage of provincial income derived from utilities production. The findings show that localities use their taxable capacities at widely different rates.
Using the median voter model, per capita demand for local public service is estimated. Income is a significant determinant, but tax-price is not. Apparently, it is due to high subsidies (grants), so that median voters perceive their tax-price as independent of the true marginal costs of providing public services.
Local governments in Indonesia are overwhelmingly dependent on central grants. The grants are largely provided in a way that does not ensure their most effective use. The grants come with heavy strings attached, leading local governments to have nearly no discretion on expenditures. The amount of grants is largely unpredictable and fluctuates widely. There is an indication that the grants substitute for local taxes. The findings also show that the grants are income elastic. As a whole, the grants are neutral toward local revenue potential, but they are significantly correlated with local expenditure needs.
Kata Kunci : Central-local,fiscal, relations, Indonesia
