The General Allocation Fund (DAU) Formulation Policy: Incentives or Disincentives to the Fiscal Independence  of Local Governments

Kun Haribowo; Latri Wihastuti

doi:10.24843/JEKT.2022.v15.i01.p11

Kun Haribowo Universitas Gadjah Mada
Latri Wihastuti Universitas Gajah Mada

DOI: https://doi.org/10.24843/JEKT.2022.v15.i01.p11

Abstract

The implementation of fiscal decentralization in Indonesia is expected to improve economic welfare for the people in the regions because it can bring the government closer to the community in providing public services according to people's preferences. As a consequence of decentralization, the central government provides transfer funds to local governments. The amount of transfer funds to local governments is around thirty percent of total National Budget (APBN), excluding central expenditure funds allocated to regions. Central government expect the fiscal dependence of local governments to be reduced. In fact, since regional autonomy was implemented in 2001 until 20 years later, regional independence has never been achieved. Ratio of local revenues (Pendapatan Asli Daerah,PAD) to total revenues in Regional Budget (APBD) ranged from 36.8 percent in Java to only 6.1 percent in Maluku and Papua., the rest still expects transfer funds from the central government. It is suspected that regional independence is closely related to the formulation of the General Allocation Fund (Dana Alokasi Umum, DAU) where PAD is a component of reducing DAU in the formulation. It can be seen from this formulation that the central government has ambiguous policies. On the one hand, it punishes local governments whose PAD efforts are high by providing a smaller DAU, but on the other hand they hope that the regional fiscal dependence will be decrease through an increase in PAD. When there is a view that the effort to collect local taxes is not an important factor for the regions, the regions will prefer to receive a higher DAU rather than increasing their tax collection effort but reducing the DAU. This study will try to analyze the efforts of local governments and will examine the data on variables related to the DAU whether it is consistent with its formulation. Through Weight Least Square (WLS) analysis which is more suitable for heteroscedasticity data that may arise from the diversity of data between regions, this study will see whether the DAU formulation becomes an incentive or disincentive for regional fiscal independence through increasing PAD. The results showed that the PAD variable had a negative relationship with DAU. This means that the DAU formula actually becomes a disincentive for regions to increase their PAD. The greater the PAD, the smaller the DAU received by the local government. Review this policies or reformulate the DAU formulation in accordance with the principles of local government fiscal independence need to be implemented immediately.

Downloads

Download data is not yet available.

References

Alm, J., Bahl, R. W., & Aten, R. H. (2001). Can Indonesia Decentralize Successfully? Plans, Problems And Prospects. Bulletin of Indonesian Economic Studies, Taylor and Francis Journals, 83-102.
Bardhan, P., & Mookherjee, D. (2002). Corruption and decentralization of infrastructure in developing countries.
Breton, A., & Scott, A. (1978). The Economic Constitution of Federal States. Toronto / BuValo / London: University of Toronto Press.
Brueckner, J. K. (2004). Fiscal Decentralization with Distortionary Taxation:Tiebout vs. Tax Competition. International Tax and Public Finance, 11(2), 133-153.
Bryson, P. J., & Cornia, G. C. (2000). Fiscal Decentralisation in Economic Transformation: The Czech and Slovak Cases. Europe-Asia Studies, 52(3), 507-522.
Burki, S. J., Dillinger, W., & Perry, G. E. (1999). Beyond The Centre: Decentralizing the State. Distrik Columbia Washington: World Bank.
Campbell, R. J. (2004). Leviathan and fiscal illusion in local government overlapping jurisdictions. Public Choice, 301-329.
Dafflon, B. (1977). Federal Finance in Theory and Practice with Special Reference to Switzerland. Dalam E. Höhn, Schriftenreihe Finanzwirtschaft und Finanzrecht (Vol. 21). Bern/Stuttgart: Paul Haupt Verlag.
Calabrese, S.M., D.N. Epple and R.E. Romano (2012). Inefficiencies from metropolitan political and fiscal decentralization: Failures of Tiebout competition. The Review of Economic Studies, Vol. 79, pp. 1081-1111.
Douglas C. Montgomery, Elizabeth A Peck, G. Geoffrey Vining (2012). Introduction to Linear Regression Analysis. New York: Wiley

Fisman, R., & Gatti, R. (2002). Decentralization and corruption: Evidence across countries. Journal of Public Economics, 83(3), 325-345.
Gramlich, E. M. (1990). The Economics of Fiscal Federalism and Its Reform. Dalam T. R. Swartz, & J. E. Peck, The Changing Face of Fiscal Federalism (hal. 152-174). New York: Rouletdge.
Hochman, O., Pines, D., & Thisse, J.-F. (1995). On the Optimal Structure of Local Governments. The American Economic Review, 85(5).
Huang, Jr-Tsung, Lo, Kuang-Ta, She, Po-Wen (2012). The impact of fiscal decentralization on tax effort of China's local governments after the tax sharing system. The Singapore Economic Review (SER)
Indonesia, K. K. (2021). Nota Keuangan dan APBN 2021. Jakarta: Kementerian Keuangan Republik Indonesia.
Indonesia, P. P. (2004). UU No. 33 Tahun 2004. Republik Indonesia.
Inman R. (1988). Federal Assistance and Local Services in the United States: The Evolution of a New Federalist Fiscal Order, In H. Rosen, (eds.), Fiscal Federalism: Quantitative Studies. Chicago: University of Chicago Press, pp. 33–77.
Jha, Raghbendra, Kang, Woojin, Nagarajan, Hari (2011) . Fiscal Decentralization and Local Tax Effort. Book. Sage Publications
Keen, M. J., & Kotsogiannis, C. (2002). Does Federalism Lead to Excessively High Taxes? American Economic Review, 92(1), 363-370.
Lee, R. D., Johnson, R., & Gotwals, P. J. (2008). Public Budgeting Systems. Massachusetts: Jones and Bartlett Publishers.
Lessman, C. (2009). Fiscal Decentralization and Regional Disparity. Dresden Discussion Paper in Economics 08/09.
Mahi, R. (2003). Local Revenue Mobilization. The Fifth IRSA International Conference. Bandung.
Marlow, M. L. (1988, March). Fiscal Decentralization and Government Size. Public Choice, 56, 259-269.
Martinez-Vazquez, J., & McNab, R. (2005). Fiscal Decentralization, Macrostability, and Growth. International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0506.
Musgrave, R. A. (1959). The Theory of Public Finance. New York: Mcgraw-Hill.
Nicholson-Crotty, S. (2009). Fiscal Federalism and Tax Effort in the American States. Report 04-2009.
Oates, W. E. (1972). Fiscal Federalism. New York: Harcourt Brace Jovanovich.
Peacock, A. T. (1972). Fiscal Means and Political Ends. Dalam M. Peston, & B. Corry, Essays in Honour of Lionel Robbins (hal. 82-98). London: Weidenfeld and Nicolson.
Sean Nicholson-Crotty (2009). Fiscal Federalism and Tax Eff ort in the American States. Truman Policy Research
Schelker, M. (2005). Fiscal decentralization: Efficiency vs. Redistribution? An institutional feature to resolve the trade-off. Annual Meeting of ISNIE. Center for Public Finance, University of Fribourg.
Slinko, I., Yakovlev, E., & Zhuravskaya, E. (2005). Laws for Sale: Evidence from Russia. American Law and Economics Review, 7(1), 284-318.
Sonin, K. (2003). Provincial Protectionism. CEFIR.
Tanzi, V. (2000). Some politically incorrect remarks on decentralization and public finance. Dalam J. J. Dethier, Governance, decentralization and reform in China, India and Russia. Dordrecht: Kluwer Academic Publishers.
Tiebout, C. M. (1956, October). A Pure Theory of Local Expenditures. Journal of Political Economy, 64, 416-424.
Tresch, R. W. (2002). Public Finance: A Normative Theory. Chicago: Academic Press.
Weingast, B. R. (2007). Second Generation Fiscal Federalism:Implications for Decentralized Democratic Governance and Economic Development. Decentralization and Democratic Local Governance Progamming Handbook.
Wiseman, J. (1964). The Political Economy of Federalism: A Survey and a Proposal. Paper prepared for the Canadian Royal Commission on Taxation, Ottawa.
Wiseman, J. (1987). The Political Economy of Federalism: A Critical Appraisal. Environment and Planning C: Government and Policy, 383-410.