Indonesia’s New Fiscal Decentralisation Law: A Critical Assessment

Abstract

Indonesia’s new law on fiscal decentralisation, Law 1/2022, begins implementation this year. The legislation makes numerous noteworthy technical adjustments to the intergovernmental fiscal framework. The broader, more implicit intent of the law is clearly to facilitate more central government control over regions. The increased control is operationalised through a variety of standard public finance tools, with a particular emphasis on performance incentives, revenue earmarks and spending mandates. Unfortunately, the design of many of the law’s reforms is rather flawed. Moreover, the legislation does not—indeed, it cannot—address the main underlying problems of decentralisation such as corruption and clientelism. As a result, the law’s interventions are unlikely to satisfactorily realise their intended objectives of improving the distributional equity of transfers across regions and enhancing subnational government tax mobilisation, spending efficiency and service delivery outcomes.