Fiscal Disparities in Indonesia under Decentralization: To What Extent Has General Allocation Grant(DAU) Equalized Fiscal Revenues?

Takahiro Akita, Awaludin Riadi and Ali Rizal
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Awaludin Riadi: Directorate General of Taxation, Ministry of Finance, Indonesia
Ali Rizal: Directorate General of Taxation, Ministry of Finance, Indonesia

No EMS_2019_05, Working Papers from Research Institute, International University of Japan

Abstract: This study analyzes the level and trend of fiscal disparity across districts and explores the determinants of fiscal disparity by two inequality decomposition methods. Disparity in per capita shared revenue (DBH) has been the highest since 2003 due to the very unevenspatial distribution of natural resources and tax bases. DBH is unambiguously aninequality-increasing fiscal transfer. While general allocation grant (DAU) has served toequalize fiscal revenue, fiscal disparity is still very high. To further reduce the disparity,it may be necessary to modify the DAU allocation formula. This study proposes a newallocation formula. Though the reduction in fiscal disparity is not substantial under thenew formula, it would encourage resource-poorer districts to raise own source revenue(PAD). This could create a virtuous cycle, since the rise in PAD would enable districtgovernments to promote their economy through further development of human resources and infrastructure and this would in turn raise PAD. Another option to reduce fiscal disparity would be the further expansion of special allocation grant (DAK). If the government allocates the DAK funds effectively across districts, then it could make DAKan inequality-decreasing fiscal transfer.

Keywords: fiscal disparity; decentralization; general allocation grant; inequality decomposition analysis; Indonesia (search for similar items in EconPapers)
JEL-codes: H71 H77 R51 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2019-10
New Economics Papers: this item is included in nep-mac and nep-sea
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