The Presence and Absence of Decentralisation

The 1998 Reformasi marked the end of the era of centralised power and the beginning of a new chapter of regional autonomy. Regions now have the authority to manage their own governmental affairs, including the authority to manage their own finances.

According to Oates, local governments are considered more efficient in providing public services because they have information that is closer to community preferences. Ideally, this principle should also be accompanied by adequate fiscal transfer support from the centre.

After nearly three decades, transfers to regions have continued to grow year on year. This is reflected in their realisation from 2001 to 2025, which increased tenfold, from Rp81 trillion to Rp849 trillion. The share of regional transfer funds in state spending has also been substantial, fluctuating in the range of 31–62 percent.

However, that trend reverses direction in 2026. The central government is slashing regional transfer funds massively, down around 18 percent from 2025 to Rp697 trillion. Its share of state spending has also touched its lowest point in the last 25 years, at only around 21 percent.

This cut is not solely due to fiscal pressure, but rather because spending priorities have shifted. State spending is being poured out to finance the President’s priority programmes, such as Free Nutritious Meals and the Red and White Village Cooperatives.

Amid a narrowing fiscal space, regions are instead being hit with additional burdens. The central mandate to appoint honorary workers as government employees with work agreements has caused regional personnel spending to surge drastically. As a result, the cash positions of several regions have become increasingly squeezed, to the point that they can no longer bear the burden of paying civil servant salaries.

Responding to this condition, the central government ultimately disbursed funds amounting to Rp20.5 trillion to 490 severely affected regions. Strangely, this injection of funds is not recorded as a transfer to regions, but is instead labelled as central government ‘assistance’.

The impact of the budget tightening has also spread to the lowest level of government. The Village Fund allocation has been cut from Rp71 trillion to Rp60.57 trillion, with around 58 percent of it allocated specifically for the Red and White Village Cooperatives programme. The remaining budget is then immediately deducted for instalments on Himbara bank loans of Rp3 billion per unit over six years.

This recurring pattern at every level is suspected to be a symptom of fiscal recentralisation. This symptom is marked by the return of a centralised transfer system. Borrowing the principal-agent theory framework, the centre now acts as the principal that holds control over resources, while regions become agents that implement programmes in accordance with the centre’s direction.

Furthermore, in a political economy approach, this symptom shows that fiscal relations are never detached from political calculations and incentives. The withdrawal of control to the centre serves as a strategy to consolidate control over resources. As a result, regions are increasingly dependent on central policy, and the space to determine their own development priorities is increasingly narrowing.

So who ultimately bears the impact of all this? The answer is the people in the regions. Programmes designed uniformly from the centre are often unable to answer the different problems in each region.

When more of the budget is absorbed to finance centrally directed programmes, the room for regions to provide basic services shrinks. Damaged roads, delayed services, and stalled development are the high costs that must be paid by the public.

If the original spirit of decentralisation was to bring public services closer to the people, then improvements need to reach the structural level. At least two things can be pursued.

First, the regional transfer formula needs to be strengthened so that it has binding legal certainty and is not vulnerable to being changed by short-term policies. Through a rigid formula, the centre’s discretionary space can be limited, and it can be ensured that central-regional fiscal relations operate on the principle of fairness.

Second, the principle of money follows function. When there is a new programme or mandate from the centre, its funding must be clearly ensured to be available, not by cutting regional entitlements or diverting budgets from other service items.

Ultimately, regional autonomy is not merely an administrative division of power, but an effort to maintain a fair state presence in every region. If that space continues to narrow, decentralisation will only remain a name: present in regulation, yet absent in reality.