Fiscal Creativity Is Key to Regional Development

In the two years since President Prabowo Subianto and Vice-President Gibran Rakabuming Raka took office, the role of regional government has become a serious topic of debate. Government continues to function and civil servants remain at work, but the state’s presence through public services is gradually losing its meaning.

As local fiscal space continues to narrow, regional governments seem to be losing their ability to reach communities and carry out their duties. Regional autonomy risks becoming little more than an administrative structure: government and bureaucracy remain in place, but public services are increasingly eroded.

The current design of regional government resembles someone unsure which way to turn: decentralisation is half-hearted and centralisation is half-dead. Local governments are left bewildered, with budgets as thin as tissue paper and workloads as thick as a dictionary—in short, a mess.

On the one hand, they are expected to make central government programmes succeed; on the other, their own affairs are neglected as budgets come under mounting strain. When problems arise with the Free Nutritious Meals programme (MBG) and food-poisoning cases occur, local governments are once again on the front line through their health departments. The same is true when the Red and White Village/Sub-district Cooperatives face difficulties: local governments are again asked to step in. This shows just how significant their role is.

Local governments and the double burden of meeting indices

My recent views also sparked considerable discussion on social media platform X after I attended the launch of an index at a ministry. I see a fundamental problem in the relationship between central and regional government.

Local governments seem to have become the target of various agendas set by central ministries and agencies. These bodies issue a range of indices, including the Bureaucratic Reform Index, Legal Reform Index, Corruption Eradication Index and Regional Financial Management Index, as well as dozens of other technical indices.

Does this not place an additional burden on local governments, particularly when some indices have overlapping indicators, assessment mechanisms and objectives? The fundamental question is simple: do all these indices genuinely improve public services, or do they merely lengthen the list of administrative tasks for local governments?

I have no hesitation in saying that this is a misconception in governance. The central government formulates indices, local governments become the subjects of assessment, and they are then burdened with monitoring and evaluation activities, before the process ends with award ceremonies in hotels at the end of the year.

This cycle is repeated almost every year, while local governments must devote time, effort and resources to meeting various administrative demands. When will they have enough time and energy to serve the public if their bureaucracies are instead preoccupied with satisfying demands for indices from multiple ministries and agencies?

Local governments must not become more occupied with preparing assessment documents than with ensuring that public services operate effectively and development meets people’s needs. This was the point I made in my article in Kompas on 3 November 2025, ‘Preventing an Unproductive Bureaucracy’: it is time to move on from old bureaucratic practices that merely consume public money on nostalgia and ceremony.

This issue cannot be separated from the number of ministries and agencies that each have their own agendas, indicators and evaluation mechanisms. When policy coordination and integration at central level are inadequate, local governments bear the consequences. Rather than being strategic partners in achieving national development goals, they risk being treated merely as objects of assessment or even as ‘work fodder’ for various central institutions.

More recently, the Ministry of Home Affairs and the National Nutrition Agency have reportedly instructed local governments that their contribution to the success of the MBG programme will be one of the indicators for allocating fiscal incentives. This further adds to the burden on local governments, which already face a range of indices, indicators and performance assessments imposed by central government.

This way of thinking needs to change. Bureaucratic reform should not add to local governments’ administrative burden through a proliferation of unintegrated indices. What is needed is the consolidation of indicators, harmonised evaluations and simplified reporting, so local governments can focus more on their principal duties: serving the public and delivering development that meets regional needs.

Local governments are not merely objects of central government evaluation. They are an integral part of national governance and the front line of public service delivery. Reform is therefore needed in the way central and regional government relate to one another: rather than multiplying assessment tools, the priority should be to strengthen capacity, clarify the division of powers and ensure that central policies genuinely help local governments work more effectively.

The success of a local government should not be measured by how many indices it meets or awards it brings home, but by how tangibly people feel the government’s presence. Local governments must not end up knowing better how to score well on indices than how to solve people’s problems.

Local fiscal health

After nearly two years of implementing the budget-efficiency policy under Presidential Instruction No. 1/2025, various developments on the ground offer important lessons for improving policy in the future. In some regions, adjustments to government spending have also affected economic activity that has traditionally relied on public expenditure, including the hotel sector, services supporting government activities and other local businesses.

This shows that efficiency measures need to be accompanied by adequate mitigation strategies, so fiscal adjustment remains aligned with efforts to sustain regional economic growth and local businesses. There are also challenges in maintaining the quality of public services while budgets are being rationalised.

Some local governments still struggle to adjust programme priorities and allocate resources more effectively. In certain cases, this has led to delays in programmes and specific services.

The efficiency agenda, then, is not simply about cutting expenditure. It also requires bureaucratic transformation, digital public services, streamlined business processes, and stronger planning and budgeting capacity, so efficiency can be achieved without compromising the quality of public services.

Budget efficiency does not automatically close off opportunities for innovation by regional leaders. On the contrary, fiscal constraints test their technical capacity to set priorities, make the best use of resources and devise alternative ways to finance development.

In this context, fiscal innovation matters: limited budgets must not lead to stalled development or declining public-service quality. One available instrument is central government lending, as regulated by Government Regulation No. 38/2025 on Loans Granted by the Central Government, signed by President Prabowo Subianto on 10 September 2025.

The regulation creates financing opportunities for local governments and state- or region-owned enterprises to support development and public-service provision. But loans are not consequence-free additional income. The financing comes from the state budget and creates an obligation to repay principal and interest under the applicable rules.

Late payments may also incur penalties. Any use of loans must therefore be based on an assessment of fiscal capacity, project viability and measurable economic and social benefits. A loan should be considered only if it can create public value without undermining the region’s future fiscal sustainability.

Alongside central government loans, regional bonds could be an alternative form of creative financing for development. They allow local governments to raise funds from the capital market, while taking account of their ability to repay and the associated fiscal risks.

However, the authority to issue regional bonds does not mean local governments can act without limits. Issuance must comply with legislation, be supported by a comprehensive feasibility study and rest on fiscal data and projections that can be properly justified.

Fiscal innovation is not simply the ability to find new sources of finance. It also means choosing the right instruments, managing risk and ensuring that every rupiah spent produces public benefit. This is where regional leaders’ technical competence is tested: not only in their willingness to make decisions, but in the accuracy of their calculations, the accountability of their management and the sustainability of development.

The lifeblood of regional development

Running a regional government is no easy task. Every regional leader faces a structural mismatch between local revenue capacity and the spending required for development.

Large-scale infrastructure projects—from road improvements to ease congestion and the construction of regional public hospitals and ports, to the provision of mass transport—require substantial financing to be available within a relatively short period (front-loaded capital).

If local governments rely only on limited locally generated revenue (PAD) or central government transfers whose use is earmarked, strategic projects may be slow to materialise. In such circumstances, regional bonds could offer an alternative source of financing to accelerate development, provided they are backed by adequate fiscal capacity, thorough feasibility assessments and accountable risk management.

At the same time, local governments will gain additional fiscal space through an increase in regional transfers (TKD) in the 2027 state budget to Rp735 trillion. The House of Representatives passed the 2027 State Budget Law on Tuesday, 29 September 2026, setting state expenditure at Rp4,106.26 trillion. The TKD allocation is 5.5 per cent higher than the projected outturn for 2026.

The increase in TKD should be viewed as an effort to strengthen regional fiscal capacity and maintain continuity in development. However, additional transfers should not simply mean more room to spend.

The next challenge is to ensure that the funds go towards productive development that addresses people’s needs, improves public-service quality and delivers long-term economic benefits. The sustainability of regional development will therefore depend not only on the scale of central government transfers, but also on regional leaders’ ability to manage every fiscal resource effectively, measurably and responsibly.

In addition, a plan to transfer the employment status of contract-based government teachers (PPPK) to central government employees could be a fiscal reform measure to improve the health of regional budgets. The rigidity of personnel spending has long restricted fiscal space and local governments’ discretion in carrying out their responsibilities.

The allocation of funding responsibilities should be adjusted to strengthen regional fiscal capacity, so that regional autonomy is not merely administrative but is also supported by the fiscal resources needed to deliver effective and responsive public services.

In the era of regional autonomy, the approach to public financing needs to shift away from one that relies solely on available cash and central government transfers towards more creative, independent and sustainable fiscal management. Regional leaders cannot simply wait for allocations from the TKD, especially when national fiscal policy can change the scale and priorities of those transfers.

Do not lose direction

In its 2019 report Making Decentralisation Work, particularly the discussion of ‘Finding the right balance between own-source revenues and transfers’, the OECD emphasises the importance of balancing revenue raised under regional powers with intergovernmental transfers.

Regional leaders therefore need to optimise PAD, improve the effectiveness of tax administration, make productive use of regional assets, and explore lawful and carefully measured alternative financing schemes.

Fiscal creativity does not mean expanding levies or taking on debt without calculation. It means building local capacity to finance public services and development adaptively, without neglecting accountability and fiscal sustainability.

In the two years of President Prabowo Subianto’s administration, constraints on the state budget have underscored the importance of technocratic leadership in setting fiscal priorities. Regional autonomy is not simply a matter of how broad local governments’ powers are; it is also about their ability to manage public finances effectively and responsibly in response to the real risks facing communities.

Finally, I must stress this: perhaps local governments are no longer busy building their regions, but instead acting as field operatives for central government ambitions. The programmes come from the centre, the problems are passed down to the regions, and the funding is nowhere to be found.

If this is how things work, are regional leaders still governing their own communities, or have they become firefighters for central government programmes? I will say it once again: it is time to leave behind old bureaucratic practices that merely consume public money on nostalgia and ceremony. It is time to ensure that bureaucratic reform actually happens. Think about it.