1. Fiscal Decentralization in Indonesia: Status and Directions for Reform Bert Hofman Lead Economist, World Bank

2. Indonesia’s Fiscal Decentralization zBig Bang Decentralization zHigh Dependency on Grants zLimited Own Tax Base zLarge Fiscal Disparities

3. Big jump in spending share

4. Largely financed by grants

5. More revenues are shared

6. And some own tax base

7. More than enough on aggregate

8. And development spending increased

9. But some are more equal than others Rp./Capita

10. The DAU is hardly helping

11. Although it reduces variation in revenues

12. The center still spends a lot

13. The center spends a lot on local functions

14. Local government has its problems zHigh share of spending on wages zLots of legal and illegal taxation zWeak financial management and accountability zWeak coordination with the province

15. Directions for reforms “Rich regions must fend for themselves, poor must be assisted by the center”  Central government should spend less on local functions  Resources can be devolved though  Own tax base for regions  DAK  DAU

16. Directions for reforms  Own taxes could be:  Property tax (center can still administer)  Business tax (Hotel and restaurant tax already)  Personal Income Tax Surcharge (Opcen)

17. Conditions for reforms  Better financial management in regions  More clarity on functions/obligations  Restrictions on what taxes regions can raise (“Closed list” in Law 34)  Civil service reform  More equalizing DAU