A fair fiscal balance

Like the bill on regional administration designed to give provinces and regencies more power over their political and administrative affairs, the draft legislation on striking a fiscal balance between the central government and local administrations aims at providing the latter with more control and a bigger share of their wealth.

The bills therefore complement each other. Bigger local autonomy demands greater spending responsibilities, which should be met with a higher financing capacity. Devolving more administrative power from Jakarta, the seat of the central government, to the regions (provinces, regencies and municipalities) would be meaningless if not supplemented with bigger revenue-raising authority.

The Habibie government should be commended for its quick move to democratize local administrations and to give the local people a fairer share of the wealth in their areas, which is the essence of both bills. Overly centralized power, both political and fiscal, in Jakarta has long been cited as the main reasons behind the simmering regional tensions kept in check by authoritarianism during the 32-year-rule of Soeharto.

Regrettable, however, is that the two bills do not reflect a true commitment by the central government to distribute more power to the regions. The regional administration bill, for example, grants only "cosmetic" power to local administrations, while Jakarta will continue to call the shots in the most crucial areas of policy formulation and the choice of leadership.

The bill on the fiscal balance between the central government and local administrations also fails to directly address the egregious economic injustice suffered by local people. As the four factions in the House of Representatives pointed out during debates on the bill on Monday, the draft legislation still leaves the most important decisions on revenue-raising and revenue- sharing authority in the hands of the central government.

The new bill is certainly much better than Law No. 32 of 1956 on the same matter, yet it will not do much in addressing what local people have long felt is Jakarta's greed for the provinces' wealth and disregard for their welfare.

The draft legislation does empower local administrations to formulate their own budgets with the approval of local legislatures, and sets up strong foundations for budget accountability and control. The stipulation that empowers local legislatures to appoint public accountants as comptroller of local budgets should be lauded as a good start in establishing transparency and accountability.

However, the most important elements of the fiscal authority remain in the grasp of the central government. The bill stipulates only that sources of revenue for local administrations are local income (local taxes and user charges), fiscal balancing transfers, borrowing and other legal income. Fiscal balancing transfers are defined as the regional share of property tax and the benefits from local natural resources, bloc and specific grants from the central government. In the absence of a clear-cut revenue-sharing formula, this most crucial matter will still be decided by Jakarta.

True, the central government should take into serious account the implication of revenue-sharing on distributional equity and macroeconomic management, especially in a country like Indonesia with such wide differences in economic development and natural resource endowments among the provinces. Adequate attention should also be taken concerning the central government's capacity to repay its foreign debts, now exceeding US$57 billion.

Nevertheless, a clearly delineated formula on each region's share of the benefits accrued from its natural wealth such as royalties, value added and income taxes should be stipulated in the bill. A clear formula will also serve as a great incentive to local administrations to take probusiness measures and to be more aggressive in wooing investment to their areas, knowing that a set percentage of tax proceeds from business activities will flow directly to their budget. The climate will in turn prompt provinces to make themselves greatly hospitable to businesses and set off competition between them to gain investor confidence.