JP/6/EDIT04B
JP/6/EDIT04B
Oct. 04, 2004;CD;
Revisiting fiscal balance
In so far as the process of granting more authority to the
provinces and regencies is concerned, amendments to the 1999 law
on intergovernmental fiscal balance, which were approved by the
House of Representatives last week, are not as significant as the
new legislation on regional administration.
While the new law on regional autonomy transfers the power to
elect provincial governors, regents and mayors from regional
legislative councils to the local people, the new legislation on
fiscal relations between the central government and regional
administrations does not grant additional taxing power to local
administrations.
This does not, however, dilute the significance of the new law
on intergovernmental fiscal balance which will replace Law No.
25/1999. The most important elements of the new legislation lie
in its elaborate, clear-cut provisions on budget transparency and
accountability and domestic borrowing by regional
administrations.
The new law increases the regions' take of several centrally
administered categories of state revenues, but even this raise is
only incremental. For example, total general grants to regions
which are now set minimally at 25 percent of total state internal
revenues (as envisaged in the central government budget) will
increase to 26 percent and the regions' share of oil and natural
gas revenues will rise by 0.5 percent to 15.5 percent and 30.5
percent, respectively.
Even these incremental increases will not be effective
immediately. Some of them will only be realized beginning in the
2008 fiscal year. But seen from a fiscal sustainability
standpoint, especially on the part of the central government, the
gradual, small increase in transfers from the central government
is very wise. Sharply raising the regions' take of tax revenues
may erode the central government's ability to provide equalizing
grants to poor regions.
Also similarly rational is the rejection by both the House
and central government of the demand from several regional
administrations for more taxing power. Granting regional
administrations a broader taxing power now could kill the goose
that lays the golden egg because local revenue officials, faced
with weak institutional capacity, may prefer "hunting in the zoo"
or squeezing existing taxpayers, instead of broadening the
taxpayer base.
More important elements of the new law are the emphasis it
places on the aspect of financial accountability on the part of
local administrations. The legislation stipulates elaborate and
clear-cut provisions designed to enhance budget transparency and
accountability through a better accounting system and stronger
procedures for planning, implementing, reporting and auditing
regional budgets.
To comprehend how urgent and imperative is the need for
higher standards of budget accountability, just look at how
rampant corruption has been in the regional budgets. Hundreds of
former legislative councillors in dozens of provinces, regencies
and municipalities are currently either under investigation or
prosecution on charges of corruption related to regional budget
implementation.
Similarly important are the clearly-defined provisions in the
law that allow regional administrations to take short, medium and
long-term domestic loans, including floating municipal bonds, all
within strict rules, which include a debt ceiling and require
prior approval from regional legislative councils.
Issuing bonds not only will enable regional administrations to
build better infrastructure that will stimulate investment. A
much greater impact will be the influence of the bonds on budget
transparency. Since bond issues have to meet capital market
regulations, regional administrations intending to issue bonds
are required to fulfill stringent financial criteria. They will
have to publish audited budget reports.
Rating agencies also will put regional administrations under
close scrutiny in light of rating municipal bonds and this
process will further accelerate the development of good
governance.
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