A fair fiscal balance

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.