The Impact of Decentralization on Subnational Government Fiscal Slack in Indonesia

• Published in: Public budgeting & finance Vol. 29; no. 2; pp. 27 - 47
• Main Authors: LEWIS, BLANE D., OOSTERMAN, ANDRÉ
• Format: Journal Article
• Language: English
• Published: Malden, USA Blackwell Publishing Inc 01.07.2009; Blackwell Publishing Ltd
• Subjects: Budgets; Decentralization; Decentralization in government; Developing countries; Economic Development: Regional, Urban, and Rural Analyses; Federalism; Fiscal Policy; Formal and Informal Sectors; Government; Indonesia; Institutional Arrangements O170; Intergovernmental Relations; LDCs; Local Government; Natural resources; Petroleum industry; Secession H770; Shadow Economy; State and Local Budget and Expenditures H720; State and Local Taxation, Subsidies, and Revenue H710; Studies; Transportation O180; Indonesia
• ISSN: 0275-1100; 1540-5850
• DOI: 10.1111/j.1540-5850.2009.00927.x

Since Indonesia began implementing its decentralization program in 2001, subnational unspent balances have grown rapidly and have reached levels that many officials find unreasonably high. But the extent to which subnational government reserves are excessive, in general, is not obvious. A not implausible decrease in the price of oil would reduce transfers to subnationals significantly and, if sustained, could possibly eliminate reserves in a relatively short time. Central government should not take any immediate action to reduce subnational slack resources directly but should instead focus on removing the underlying causes of such.