Fiscal decentralization

A seminar last week on the impact of local levies on the economy concluded that most local administrations are ignorant of the need to implement probusiness policies because the central government still almost entirely holds the taxing power related to main economic activities. The meeting also discovered just how dependent local administrations are on fundings from the central government due to the absence of fair rules on intergovernmental fiscal relations.

The problem seems to have been exacerbated by the uncertainty encountered by local administrations regarding their budget plans because the amount of funds transferred from the central government is set on an annual basis.

Provincial and district administrations have only a few months in which to plan their annual budgets, which are implemented on April 1, because the amount of their respective transfers from the central government are disclosed only after the national budget is proposed to the House of Representatives in the first week of January.

Local administrations, besides encountering budget funding uncertainty, have been under pressure to expand their budgets to meet the increasing demand of their local people. The result, as disclosed at the seminar, is the proliferation of local taxes and user fees. There are now five local taxes and 58 user fees collected by provincial administrations, and 36 taxes and 134 user fees levied by district administrations.

However, the results of studies discussed at the seminar revealed that quite a number of those local taxes and user fees are totally uneconomical, meaning that the costs of their administration and collection are much higher than the revenues collected. Still more shocking is the finding that the power to collect those taxes and user fees is mostly abused to extort kickbacks. All this is obviously detrimental to economic activities, notably business development. Yet since the taxation authority is still controlled almost entirely by the central government, local administrations are unaware or indifferent to the need to stimulate private investment operations in their areas.

This attitude is strikingly different from that among local administrations in countries where the decision-making and taxing power, and the responsibilities for many public services and functions, have adequately been decentralized.

Local administrations with adequate administrative autonomy always pursue probusiness policies because they fully realize that investments stimulate economic growth which in turn creates jobs, generates purchasing power and consequently widens the base of tax revenue sources and increases the opportunities for the collection of numerous user fees.

The problems described above show how imperative and urgent it is for the central government to speed up the development of local autonomy in districts. Decentralization should mean devolving both spending responsibility and revenue sources. The one year implementation of the development of local autonomy in 26 districts, selected in early 1995 as pilot projects for administration decentralization throughout the country, shows how slow the process has been due to the great hesitation on the part of central ministries to transfer their responsibilities to district-level offices. The director general for regional autonomy, Sumitro Maskum, himself admitted last month that only six of the 50 steps in the process to full autonomy in the 26 districts had been completed.

The central government should display a stronger political will to accelerate the development of local autonomy. The experiences of other countries that have decentralized their administration systems have proven that decentralization of responsibility brings local accountability. Local officials with greater autonomy will have a greater stake in good governance since they can clearly be identified by taxpayers and voters as the architects of success or the cause of failure. Local accountability seems even more crucial for such a vast archipelagic state as Indonesia.