When we started this project we believed that … … regional governments have limited resources which are distributed unevenly. … Indonesia needs more resources for education, health and infrastructure. … Indonesia has a poor fiscal position and relies heavily on revenues from oil and gas.

Indonesia Public Expenditure Review 2007 The results of Spending for Development The sectoral composition of expenditures has changed substantially since 2001: education is the big winner, infrastructure one of the losers. Regional governments, particularly the poorest and most remote, are the main beneficiaries of Indonesia’s increasing fiscal space. The macroeconomic paradigm has changed: Indonesia has a lot of fiscal space.

The macroeconomic paradigm has changed: Indonesia now has a lot of fiscal space

Indonesia Public Expenditure Review 2007 Fiscal Space is increasing and has stood at over 10% of GDP since 2006 Fiscal Space as % of GDP

Indonesia Public Expenditure Review 2007 Indonesia experienced the most rapid debt reduction in East Asia

Indonesia Public Expenditure Review 2007 High oil prices are not the main cause of additional revenues

Regional governments, particularly the poorest and most remote, are the main beneficiaries of Indonesia’s increasing fiscal space

Indonesia Public Expenditure Review 2007 The fiscal fundamentals have changed since decentralization: Transfers dominate central spending

Indonesia Public Expenditure Review 2007 The poor regions are the main beneficiaries of Indonesia’s transfer system …

Indonesia Public Expenditure Review 2007 … particularly since the second “big bang” when general transfers increased by 55 percent

Indonesia Public Expenditure Review 2007 The challenge now is to ensure that sub-national governments spend their resources effectively Districts Provinces

The sectoral composition of expenditures has changed substantially since 2001: education is the big winner, infrastructure one of the losers

Indonesia Public Expenditure Review 2007 Education is Indonesia’s number one spending item, followed by subsidies and government apparatus

Indonesia Public Expenditure Review 2007 Education: Spending is on the rise and enrollment has increased Source: Susenas ( ).

Indonesia Public Expenditure Review 2007 Education: with about 17 percent of the budget, Indonesia is close to other developing nations % of total budget

Indonesia Public Expenditure Review 2007 Health: Starting from a low base, expenditures are increasing Tr. Rp. constant 2001 prices 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% % of GDP Real National Health Exp.National Health Expenditures as % of GDP

Indonesia Public Expenditure Review 2007 Health: Although increasing, expenditures and outcomes are low by international comparison Indonesia 2004Indonesia 2006PhilippinesThailandMalaysia % Health Spending/GDP Infant Mortality Rate Total health expenditure as % GDP National government health expenditure as % total government expenditure Infant Mortality Rate (per 1000 live births)

Indonesia Public Expenditure Review 2007 Infrastructure: Indonesia is lagging behind

Indonesia Public Expenditure Review 2007 Infrastructure investment never fully recovered from the crisis

Indonesia Public Expenditure Review 2007 Subsidies are still high …

Indonesia Public Expenditure Review 2007 … and poorly targeted

Next 10 years: Making the Most of Indonesia’s New Opportunities Finishing “first generation” reforms from a position of strength, particularly in improving basic infrastructure and removing subsidies Finishing “first generation” reforms from a position of strength, particularly in improving basic infrastructure and removing subsidies Ensuring that “second generation” reforms increase access to junior and secondary education and improve service quality in education and health Ensuring that “second generation” reforms increase access to junior and secondary education and improve service quality in education and health Shift from large and discrete structural measures towards institutional reforms Shift from large and discrete structural measures towards institutional reforms

Annexes

High impact reforms

Indonesia Public Expenditure Review 2007 Central government discrepancies between realization and budget expenditures decreased in 2006

Indonesia Public Expenditure Review 2007 PFM in transition:

Indonesia Public Expenditure Review 2007 Indonesia is very diverse across districts Indicator Strongest district Weakest district Averag e Standard Deviation MexicoZambia GRDP Per Capita (USD)33, Poverty rate (%) Adult literacy rate (%) Secondary Gross Enrollment Rate (%) Life expectancy (years) Development Indicators range from developed-country-standards to entrenched poverty

Indonesia Public Expenditure Review 2007 Gov. apparatus and (not well targeted) subsidies are still a quarter of the total budget

Indonesia Public Expenditure Review 2007 What is being financed with government apparatus spending?

Indonesia Public Expenditure Review 2007 Sub-National Governments (Province + Districts) Education: the current definition of the 20% rule is unrealistic Central Government

Indonesia Public Expenditure Review 2007 Subsidies: the rich benefit from the fuel and residential electricity subsidies