Fiscal decentralization

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.