Analysis of the Impact of Fiscal Decentralization on Regional Fiscal Imbalances: A Cross-Region Case Study in Java
Article Sidebar
Main Article Content
Abstract
Research Originality — This study contributes to the discourse on fiscal decentralization by examining the impact of Law Number 1 of 2022 on Intergovernmental Financial Relations (UU HKPD) and the Transfer to Local Government (TKD) mechanism in Indonesia. Unlike previous studies, this research provides a comparative analysis of vertical fiscal imbalances (VFI) and horizontal fiscal imbalances (HFI) before and after the enactment of the HKPD Law, with a specific focus on local governments in Java.
Research Objectives — The primary objective of this study is to analyze the extent and trends of VFI and HFI resulting from fiscal policy, particularly through the TKD mechanism, both before and after the implementation of the HKPD Law. It further assesses the effectiveness of Revenue Sharing Funds (DBH) and the General Allocation Fund (DAU) in mitigating fiscal disparities at the regional level.
Research Methods — This study employs quantitative analysis, utilizing the Williamson Index, Theil Index, and Standard Deviation to measure fiscal imbalances. The research dataset consists of local government financial reports covering the period of 2018–2023.
Empirical Results — The findings indicate that VFI between the central and regional governments declined following the implementation of the HKPD Law, as evidenced by improved DBH allocations. Meanwhile, HFI initially increased but exhibited a downward trend in the post-HKPD period, with DAU playing a crucial role in reducing disparities among local governments. However, fiscal imbalances persist due to Indonesia’s expenditure assignment principle, which grants local governments autonomy over expenditures while limiting their ability to generate revenue effectively.
Implications — The study confirms that the TKD policy under the HKPD Law has effectively reduced fiscal imbalances but remains insufficient to fully eliminate them due to structural constraints in local revenue generation. Policymakers should focus on strengthening local taxing power, optimizing regional revenue potential, and improving fiscal administration to enhance fiscal autonomy. Future research should consider longer timeframes and broader geographical coverage to evaluate comprehensively fiscal decentralization policies.
Article Details
This work is licensed under a Creative Commons Attribution 4.0 International License.
Copyright notice can be accessed here
References
Adam, C. S., & Bevan, D. L. (2005). Fiscal deficits and growth in developing countries. Journal of Public Economics, 89(4), 571–597. https://doi.org/10.1016/j.jpubeco.2004.02.006
Ahmad, I., Arif, M. Z., & Khalid, M. (2016). From fiscal decentralisation to economic growth: The Role of complementary institutions. Pakistan Development Review, 55(4), 761–780. https://doi.org/10.30541/v55i4i-iipp.761-780
Akai, N., Nishimura, Y., & Sakata, M. (2007). Complementarity, fiscal decentralization and economic growth. Economics of Governance, 8(4), 339–362. https://doi.org/10.1007/s10101-007-0032-5
Angeletos, G.-M., & Pavan, A. (2007). Efficient use of information and social value of information. Econometrica, 75(4), 1103–1142. https://doi.org/10.1111/j.1468-0262.2007.00783.x
Arif, U., & Ahmad, E. (2020). A framework for analyzing the impact of fiscal decentralization on macroeconomic performance, governance and economic growth. Singapore Economic Review, 65(1), 3–39. https://doi.org/10.1142/S0217590818500194
Bahl, R., & Bird, R. M. (2018). Fiscal decentralization and local finance in developing countries: Development from below. In Fiscal Decentralization and Local Finance in Developing Countries: Development from Below. Edward Elgar Publishing. https://doi.org/10.4337/9781786435309
Bahl, R. W., & Wallich, C. (1992). Intergovernmental fiscal relations in China. The World Bank, Country Economics Department, 1–45.
Barro, R. J., & Sala-I-Martin, X. (1992). Convergence. Journal of Political Economy, 100(2), 223–251. https://doi.org/10.1086/261816
Bartolini, D., Sacchi, A., Salotti, S., & Santolini, R. (2018). Fiscal decentralization in times of financial crises. CESifo Economic Studies, 64(3), 456–488. https://doi.org/10.1093/cesifo/ifx008
Bilal, A. (2023). The geography of unemployment. Quarterly Journal of Economics, 138(3), 1507–1576. https://doi.org/10.1093/qje/qjad010
Bird, R. M., & Vaillancourt, F. (1998). Fiscal decentralization in developing countries: an overview. Fiscal Decentralization in Developing Countries, 1, 1–48.
Bojanic, A. N. (2020). The empirical evidence on the determinants of fiscal decentralization. Revista Finanzas y Politica Economica, 12(1), 271–302. https://doi.org/10.14718/REVFINANZPOLITECON.V12.N1.2020.2656
Breuss, F., & Eller, M. (2004). The optimal decentralisation of government activity: normative recommendations for the European constitution. Constitutional Political Economy, 15(1), 27–76. https://doi.org/10.1023/B:COPE.0000017962.76744.33
Cabaleiro-Casal, R., & Buch-Gómez, E. (2015). Public spending policies and budgetary balances: evidence from Spanish municipalities. Lex Localis, 13(4), 973–994. https://doi.org/10.4335/13.3.973-994(2015)
Canare, T., Francisco, J. P., & Caliso, R. A. C. (2020). Decentralization and income inequality in a panel and cross-section of countries. Journal of International Development, 32(4), 543–579. https://doi.org/10.1002/jid.3468
Cevik, S. (2017). Size matters: fragmentation and vertical fiscal imbalances in Moldova. Empirica, 44(2), 367–381. https://doi.org/10.1007/s10663-016-9325-7
Chakraborty, P., & Dash, B. B. (2017). Fiscal reforms, fiscal rule, and development spending: How Indian states have performed? Public Budgeting and Finance, 37(4), 111–133. https://doi.org/10.1111/pbaf.12161
Cheema, G. S., & Rondinelli, D. A. (1983). Implementing decentralization programmes in Asia. Local capacity for rural development.
Chinn, M. D., & Ito, H. (2022). A requiem for “blame it on Beijing” interpreting rotating global current account surpluses. Journal of International Money and Finance, 121. https://doi.org/10.1016/j.jimonfin.2021.102510
Collins, D. J. (2002). The 2000 reform of intergovernmental fiscal arrangements in Australia. Proceedings of The International Symposium on Fiscal Imbalance.
Conyers, D. (1981). Decentralization for regional development: a comparative study of Tanzania, Zambia and Papua New Guinea. Public Administration and Development, 1(2), 107–120.
Cowell, F. A. (1985). Multilevel decomposition of Theil’s index of inequality. Review of Income and Wealth, 31(2), 201–205. https://doi.org/10.1111/j.1475-4991.1985.tb00508.x
Davoodi, H., & Zou, H. (1998). Fiscal decentralization and economic growth: a cross-country study. Journal of Urban Economics, 43(2), 244–257.
Di Liddo, G., Longobardi, E., & Porcelli, F. (2016). Measuring horizontal fiscal imbalance: the case of Italian municipalities. Local Government Studies, 42(3), 385–419. https://doi.org/10.1080/03003930.2016.1150836
Di Liddo, G., Longobardi, E., & Porcelli, F. (2019). Fiscal imbalances and fiscal effort of local governments. B.E. Journal of Economic Analysis and Policy, 19(3). https://doi.org/10.1515/bejeap-2018-0315
Easterlin, R. A. (1961). Israel’s development: past accomplishments and future problems. Quarterly Journal of Economics, 75(1), 63–86. https://doi.org/10.2307/1883204
Ebel, R. D., & Yilmaz, S. (2002). Concept of fiscal decentralization and worldwide overview. International Symposium on Fiscal Imbalance, 13–14.
Escaleras, M., & Chiang, E. P. (2017). Fiscal decentralization and institutional quality on the business environment. Economics Letters, 159, 161–163. https://doi.org/10.1016/j.econlet.2017.07.019
Eyraud, L., & Lusinyan, L. (2013). Vertical fiscal imbalances and fiscal performance in advanced economies. Journal of Monetary Economics, 60(5), 571–587. https://doi.org/10.1016/j.jmoneco.2013.04.012
Gadenne, L., & Singhal, M. (2014). Decentralization in developing economies. Annual Review of Economics, 6, 581–604. https://doi.org/10.1146/annurev-economics-080213-040833
Hartandi, B. A., & Adrison, V. (2022). Ketepatan waktu dalam penetapan APBD oleh kepala daerah: peran siklus politik. Indonesian Treasury Review: Jurnal Perbendaharaan, Keuangan Negara Dan Kebijakan Publik, 7(3), 271–286. https://doi.org/https://doi.org/10.33105/itrev.v7i3.436
Hunter, J. S. H. (1977). Federalism and Fiscal Balance. ANU Press.
Kim, K. (2023). How gubernatorial budgetary power and interest groups affect vertical fiscal imbalances in the US states: Focusing on fiscal centralization and decentralization. Public Budgeting and Finance, 43(2), 53–81. https://doi.org/10.1111/pbaf.12344
Koley, M., & Mandal, K. (2019). Vertical fiscal imbalances and its impact on fiscal performance: a case for indian states. In Opportunities and Challenges in Development: Essays for Sarmila Banerjee, 243–282. https://doi.org/10.1007/978-981-13-9981-7_12
Kowalik, P. (2015). Horizontal fiscal imbalance in Germany. Business and Economic Horizons, 11(1), 1–13. https://doi.org/10.15208/beh.2015.01
Kowalik, P. (2016). Measurement of vertical fiscal imbalance in Germany. Argumenta Oeconomica, 37(2), 131–146. https://doi.org/10.15611/aoe.2016.2.05
Krusell, P., & Smith Jr., A. A. (1998). Income and wealth heterogeneity in the macroeconomy. Journal of Political Economy, 106(5), 867–896. https://doi.org/10.1086/250034
Madan, S., & Yadav, M. (2022). Decomposing skill based wage inequality in India: an application of Theil index. Indian Journal of Labour Economics, 65(4), 967–979. https://doi.org/10.1007/s41027-022-00405-6
Malakar, K., & Mishra, T. (2017). Application of Gini, Theil and concentration indices for assessing water use inequality. International Journal of Social Economics, 44(10), 1335–1347. https://doi.org/10.1108/IJSE-01-2016-0017
Mao, C. C., & Ma, Z. X. (2021). The analysis of the regional economic growth and the regional financial industry development difference in China based on the Theil index. International Journal of Economics and Finance Studies, 13(1), 128–154. https://doi.org/10.34109/ijefs.202112228
Martinez-Vazquez, J., & McNab, R. M. (2001). Cross-country evidence on the relationship between fiscal decentralization, inflation, and growth. Proceedings. Annual Conference on Taxation and Minutes of the Annual Meeting of the National Tax Association, 94, 42–47. http://www.jstor.org/stable/41954701
McLean, I. (2004). Fiscal federalism in Australia. Public Administration: An International Quarterly, 8(1), 21–38. https://doi.org/doi:10.1111/padm.2004.82.issue-1
Miller, G. J. (2017). Government fiscal policy impacts. In Handbook of Public Sector Economics (pp. 425–523). https://doi.org/10.4324/9781315093185-17
Moskowitz, T. J., & Grinblatt, M. (1999). Do industries explain momentum? Journal of Finance, 54(4), 1249–1290. https://doi.org/10.1111/0022-1082.00146
Negara, B., & Khoirunurrofik, K. (2021). Dampak desentralisasi fiskal terhadap konvergensi pendapatan perkapita antar kabupaten/kota di Indonesia. Indonesian Treasury Review: Jurnal Perbendaharaan, Keuangan Negara dan Kebijakan Publik, 6(1), 1–18. https://doi.org/https://doi.org/10.33105/itrev.v6i1.185
Nguyen, V. B. (2023). From fiscal policy to income inequality in advanced economies: does institutional quality hinder? Romanian Journal of Economic Forecasting, 26(1), 165–184. https://www.scopus.com/inward/record.uri?eid=2-s2.0-85153932430&partnerID=40&md5=eeb19314324d5ff9fc42bf80ae74c6b5
Oates, W. E. (1993). Fiscal decentralization and economic development. National Tax Journal, 46(2), 237–243.
Rodden, J., & Wibbels, E. (2002). Beyond the fiction of federalism: Macroeconomic management in multitiered systems. World Politics, 54(4), 494–531. https://doi.org/doi:10.1353/ wp.2002.0016
Schneider, M. P. A., Kinsella, S., & Godin, A. (2017). Redistribution in the age of austerity: evidence from Europe 2006–2013. Applied Economics Letters, 24(10), 672–676. https://doi.org/10.1080/13504851.2016.1221030
Searle, B. (2020). Intergovernmental fiscal relations in Australia. In Intergovernmental Transfers in Federations (pp. 163–184). https://doi.org/10.4337/9781789900859.00017
Sharma, P., & Sharma, N. (2022). An examination of per capita income convergence in emerging market economies. Global Journal of Emerging Market Economies, 14(3), 319–347. https://doi.org/10.1177/09749101211034111
Shen, H., Luo, T., Gao, Z., Zhang, X., Zhang, W., & Chuang, Y.-C. (2023). Digital financial inclusion and the urban–rural income gap in China: empirical research based on the Theil index. Economic Research-Ekonomska Istrazivanja , 36(3). https://doi.org/10.1080/1331677X.2022.2156575
Thieben, U. (2003). Fiscal decentralisation and economic growth in high-income OECD countries. Fiscal Studies, 24(3), 237–274. http://www.jstor.org/stable/24438466
Timushev, E. N., & Mikhaylova, A. A. (2023). Federal transfers: Leeway to higher regional debt? Voprosy Ekonomiki, 2023(5), 23–49. https://doi.org/10.32609/0042-8736-2023-5-23-49
Utama, Z., Khusaini, M., & Wahyudi, S. (2017). Kebijakan fiskal di persimpangan, pro growth atau pro poor? Indonesian Treasury Review: Jurnal Perbendaharaan, Keuangan Negara Dan Kebijakan Publik, 2(2), 67–81. https://doi.org/https://doi.org/10.33105/itrev.v2i2.28
Vaillancourt, F. (1998). The institutional setting. Fiscal Decentralization in Developing Countries, 152.
Woller, G. M., & Phillips, K. (1998). Fiscal decentralisation and IDC economic growth: an empirical investigation. The Journal of Development Studies, 34(4), 139–148.
Yilmaz, S. (2001). Review of governance, decentralization and reform in China, India and Russia. National Tax Journal, 54(4), 853–860. http://www.jstor.org/stable/41789592
Yilmaz, S., & Zahir, F. (2020). Intergovernmental transfers in federations: studies in fiscal federalism and state-local finance series. In Intergovernmental Transfers in Federations. https://doi.org/10.4337/9781789900859
Zhang, K., Zhang, W., & Wan, X. (2021). Tax sharing and fiscal imbalances: reconstruction of the VAT sharing system in China. China Finance and Economic Review, 10(2), 22–43. https://doi.org/10.1515/cfer-2021-0009