Minister of Home Affairs: Fiscal Capacity of 85 Per Cent of Regions Remains Weak

Minister of Home Affairs Muhammad Tito Karnavian has revealed that the fiscal capacity of most local governments falls into the weak category, remaining heavily dependent on fund transfers from the central government. He noted that this condition is one of the primary obstacles in efforts to restructure regional spending, including meeting the mandatory cap on personnel expenditure, which is set at a maximum of 30 per cent of the Regional Revenue and Expenditure Budget (APBD).

During his presentation, Tito stated that mapping results from 546 regions—comprising 38 provinces, 415 regencies, and 93 cities—show that the majority of regions are unable to rely on Local Original Revenue (PAD) as their primary source of development financing. “Out of 546 regions, approximately 469 regions, or 85 per cent, have weak fiscal capacity, meaning they are highly dependent on transfers from the central government,” Tito said during a working meeting with Commission II of the House of Representatives (DPR) in Senayan, Jakarta, on Monday, 8 June 2026.

According to Tito, only about 43 regions, or 8 per cent, possess strong fiscal capacity, where local revenue exceeds transfers from the central government. Meanwhile, approximately 34 regions, or 6 per cent, fall into the moderate fiscal capacity category.

Tito further detailed the fiscal conditions based on the level of government. At the provincial level, more than half of the regions possess strong fiscal capacity. However, at the regency level, only about 8 per cent have strong fiscal capacity, while approximately 85 per cent remain in the weak category. A similar trend is observed at the city level; of the 93 cities mapped, only 15 have strong fiscal capacity, with the majority still reliant on central transfers.

Tito noted that this weak fiscal capacity makes it difficult for many regions to adjust their spending structures, particularly when faced with the requirement to limit personnel expenditure to a maximum of 30 per cent of the total APBD, which will take effect in January 2027. “From this, we can see that regional fiscal problems vary significantly,” he said.

Consequently, the former Chief of the Indonesian National Police urged regional heads to be more creative in increasing PAD without burdening the public. Suggested methods include simplifying licensing, digitalising tax and levy collection, and optimising the performance of Regional Owned Enterprises (BUMD).

Tito cited several regions that have successfully increased revenue through improved governance. For instance, Pekanbaru City managed to raise its PAD from approximately Rp 800 billion to Rp 1.2 trillion through easier licensing and improved taxpayer compliance.

In addition to boosting PAD, the government has identified approximately 39 regions that are deemed difficult to increase revenue due to limited economic potential. For these areas, the government is considering providing additional support through the relaxation of regional transfer budget amounts.

Tito stated that the disparity in fiscal capacity between regions is a key consideration for the government when evaluating the implementation of the 30 per cent APBD cap on personnel expenditure. The central government is currently discussing various options to address these limitations, including the possibility of extending the transition period for the regulation to allow regions more time for adjustment.