Implementation of Fiscal Decentralization in Indonesia: 2001-2009

In Indonesia, the implementation of fiscal decentralization has entered the 9th year, however, so far many problems and obstacles which is faced during the implementation to stimulate economic growth and reduce poverty. This study aims to analyze: trend of government expenditure in decentralization era and regional autonomy during 2001-2009 and fiscal decentralization degree in Indonesia. This objective is achieved through descriptive analysis using secondary data for 2001-2009. The result shows central government expenditure tends to decreased and transfer expenditure increased significantly every year in absolutely, but annual growth rate fluctuated considerably. This indicates the allocation portion of the transfers was unstable. The largest component of transfers is fund balance and tends to increase every year significantly, fiscal decentralization degree at districts/city and province increased in 2007-2008. It is recommended to regional government to allocate public interest bigger than for government administration such as personnel government spending.


INTRODUCTION
Fiscal decentralization is one of the most interesting issues in the theory of state and local finance, and has helped to globalize the world. Fiscal decentralization is expected to be able to overcome the various problems being faced by countries, including issues of poverty and instability of economic growth. Through fiscal decentralization, the government can recognize the needs of society so that public services become more efficient and touch the real needs of society which in turn can encourage eco-nomic growth and reduce poverty.
Many empirical studies have examined the impact of fiscal decentralization on the economy of a country such as economic growth and poverty. The relationship between fiscal decentralization and economic growth has been examined by many empirical studies (Phillips and Woller, 1997;Zhang and Zou, 1998;and Martinez-Vazquez and McNab, 2001;Rodriguez-Pose and Kroijer, 2009). Some empirical studies indicate that the relationship between the two variables is still a debate. Fiscal decentralization has a negative effect on economic growth in China (Zhang and Zou, 1998), Phillips and Woller (1997) in developing countries and a positive influence on economic growth in developed countries (Martinez-Vazquez and McNab, 2001;Rodriguez-Pose and Kroijer, 2009). Several other studies examined the relationship between fiscal decentralization and poverty McNab, 2001, Susan, 2005). Martinez-Vazquez and McNab, (2001) concluded that the policy of spending more precise than the revenue policy. World Bank (2007) recommends that the problems of poverty can be overcome by making the pro poor budgeting.
There are three indicators of fiscal decentralization that are commonly used by many empirical studies: (1) Decentralization of expenditure is defined as the ratio of total expenditure in each district/city in the region budget (APBD) of total government expenditures (State Budget) (Phillips and Woller, 1997;Zhang and Zou, 1998;Rodriquez-Pose and Kroijer, 2009). This shows the relative size of government expenditures between regional governments and the central government, (2) Decentralization of development expenditures is defined as the ratio between the total development expenditure of each district/city (APBD) relative to the total national development expenditure (APBN). This variable indicates the relative size of government expenditure in development between local and central government. From this ratio it can be seen whether the regional government is in a good position to carry out public sector investment or not. If there is a positive relationship between these variables with economic growth, the regional government is in a good position, (3) Revenue decentralization is defined as the ratio between the total revenue of each district/city does not include subsidies to total government revenue (Philips and Woller, 1997). This variable expresses the relative amount of revenue regional governments against central governments.
Fiscal decentralization policy and regional autonomy has been implemented in Indonesia since 2001 and aims to support the achievement of national development for the creation of prosperity of the community. During the period of 2001-2010, a lot of expectations should be realized, however it should be recognized that many problems and constraints are still faced during the implementation of fiscal decentralization.
This study aims: (1) to analyze the trend of government expenditure in Indonesia, (2) to analyze the degree of fiscal decentralization in the era of decentralization and regional autonomy for the period of 2001-2009.

RESEARCH METHOD
This research used descriptive research approach. The type of data is secondary data which collected from various sources inclduded internet, World Bank reports, and other documents. Secondary data were analyzed through descriptive statistical models that described the development of regional (district/city) revenue and expenditure in the decentralization era and the trend of indicators of fiscal decentralization in Indonesia for the last three years (2007)(2008)(2009). Indicator of fiscal decentralization which analyzed was expenditure side which measured by ratio of district/city government expenditure to total national expenditures.

Trend of State Government Expenditure
Fiscal decentralization has several objectives as follows (Anggito, 2008): (1) to reduce fiscal dis-parities between central and regional governments (vertical fiscal imbalance) and regions (horizontal fiscal imbalance), (2) to improve the quality of public services in the area and reduce public service gaps among regions, (3) to improve the efficiency of utilization of national resources, 4) to strict governance, transparency, and accountability in the allocation of activities transferred to the regions targeted, timely, efficiency, and fair, and (5) to support sustainability fiscal macroeconomic policy.
It is understood, of course, that it is impossible to achieve fully all these objectives, everywhere and all the times. Some goals may conflict with one another, and, to the extent that objectives are not consistent, hard choices will have to be made. At least, however, the purpose of this policy is to provide a basis for evaluating the relative success of the implementation of a fiscal decentralization program. In addition, it is noted that the ultimate goal of all these goals is to create greater well-being of a better society through increased regional economic growth.
To find out how far one or more objective is reached, the necessary fiscal decentralization indicators are commonly used by many countries. Here are some indicators of fiscal decentralization is applied in Indonesia (Khuzaini, 2006): (1) Decentralization of expenditure, (2) decentralization of revenues, and (3) decentralization of development expenditures. The same opinion by Martinez-Vazquez and Sri Mulyani (2003), the degree of fiscal decentralization measures can be seen from the sub-national share to national revenue and expenditure. Furthermore, they argued that these measures are far from perfect proxies of the degree of decentralization their use is common and, within limits, can be instructive.
The main instrument of fiscal decentralization is the transfer of central government to regional governments consisting of balance fund and the special autonomy fund. Balance fund consists of revenue sharing, the General Allocation Fund (DAU), and the special allocation fund (DAK). In the new budget structure, the expenditure component is composed of two areas: central government expenditure at National level (centers) and regional expenditure.
Regional expenditure includes expenditure by the central government in the region (through Ministries/Institution; K/L, vertical funds, deconcentration funds, the duty of assistance funds) and transfers to the region through APBD.
As illustration in 2008, central government expenditure to the regions is 41 percent consisted of centers government expenditure in the region is 12 percent (by K/L; vertical funds, de-concentration funds, and the duty of assistance) and transfers to the regions is 29 percent, while center government expenditures at the national level by 34 percent. In 2009, the state budget funds to the region increased to 76 percent which consists of government expenditure through the K/L by 45 percent and transfer to the regions by 31 percent (Figure 1 and 2). In addition, there are other programs such as PNPM which has absorbed the State Budget so that the amount of money circulated at the regional level increases. By looking at the development of central government expenditure during the era of regional autonomy and fiscal decentralization seems the central government expenditure decreased and the transfer expenditure increased. In 2008, the largest transfers were allocated to the DAU for 62 percent, the rest is 38 percent which allocated to the DAK, profit-sharing and funds special auton-omy (Otsus). But in 2009, transfer to the DAU decreased to 58 percent, the rest is 42 percent is allocated to the other components of the balance funds and funds Otsus. What is interesting to note further is the development of the State government expenditure over the period [2001][2002][2003][2004][2005][2006][2007][2008][2009]. Does the State expenditure significantly affect the national economy in the era of decentralization and local autonomy? In general there is a tendency for the regional expenditure increased every year with an average per year is 18.   Similarly regions that receive DAK also increased due to expansion of the provincial and district or city. East Java is the highest region that received DAK allocation in 2008.
From Figure 3 to 7 shows the transfer of funds from central government to regional governments (provincial and district/city). It can be concluded that the allocation of funds transfers (the fund balance) to the regional government has absorbed most of the state budget. DAU is the largest component of the balance funds. Fund balance is one source of regional government revenue. The presence of the balance of funds as one source of regional revenue affects the structure of regional government budgets. Thus, the structure of regional government budget consists of regional revenues, expenditure and financing. The regional revenue side consist of local own revenue (PAD), fund balance and other local revenues.
One of the purposes of the policy of regional autonomy and fiscal decentralization is the reduction of financial dependence by the regional governments to central government. This means that regional governments are required to increase the potential revenue source that comes from their own region. In this case the question arises how far regional governments have reduced their dependency levels during the implementation of regional autonomy and fiscal decentralization?

The Degree of Fiscal Decentralization in Indonesia
Act No. 34 of 2000 mentioned that there are 11 (eleven) local taxes granted to regional governments (provincial and district/city) in determining the tax base, tax rates and as well as administrative and types of local taxes and user charge that may be levied by regional governments. However, the Act allows regional governments to add local tax sources and user charges in accordance with predetermined criteria (Simanjuntak and Mahi, 2003). The eleven of the local taxes can be seen in Table 1.
With the presence of such Act, has the regional government PAD increased significantly? Realization of the sources of regional revenue for all provinces and districts/cities can be seen in Figure 8. For three years (2007)(2008)(2009), fund balance position as the largest source of regional revenue with an average of Rp191.45 trillion per year, the second largest revenue is PAD with an average increase of     After rev of regional g und transfer can be conclu s recorded Rp140.6 trilli 2009 or incr rillion per y ng the peri provide grea n funding t ooking at th can say that obstacle for r be expected ive correlati egional reve are.
The suc policies of ea cy can be d gional reven oriented to th so it can crea poor people will be refle ure. There a he structure direct expend ect expendi ectly related activities. Th So Figure 11 viewing and overnment r r and other l uded that th substantial ion in 2007 reased by an year, or grow iod 2007-20 at meaning to the provisio he magnitud the fundin regional gov to occur is ion between enues and i ccess of a r ach regional done throug nues in pr he needs of s ate jobs and e. Allocation ected in the are two com e of regional diture and d iture is expe d to the fin here are eigh ource: Finance M if the total expenditure of district/city compared to the total national expenditures, the degree of fiscal decentralization is still considered low at only 34.6 percent.
In general one can say that government's ability District/City to finance the functions which are the responsibility has increased. The same thing for the province, the degree of fiscal decentralization is also showing signs encouraging enough, but the average ratio of the increase is not as much as at the district level. The ratio increased by an average 9.98 percent, 26.62 percent and 7.79 percent respectively (expenditures minus state subsidies), the total transfer fund, and the total national expenditure ( Figure  14).
Fiscal decentralization has the objective to support the funding of affairs that has been submitted to the region, so that regions can improve the efficiency and effectiveness of public service. Through fiscal decentralization is expected to provide an opportunity for the region to improve the welfare of society, which in turn will promote economic development of regional development. However, the efforts of regional economic improvement and improvement of social welfare cannot be simply handed over to the fiscal decentralization policy. A good regional development can only be done if there is a balance of three pillars, namely the government, private sector, and society. All three each have the different functions and roles in carrying out the development. Government role is to create political and legal environment conducive to private sector and the community. Private sector role is to create jobs and income that should be supported by the government sector. Society plays a role in the creation of social interaction, economic, and political. Synergy between the three sectors in the era of regional autonomy should be implemented.
To analyze the success of fiscal decentralization may be associated with the success of regional economic development. There are several indicators that can be used, among others; regional economic growth, low inflation and stable, employment opportunities, increased investment and exports, and poverty reduction. Economic growth is one indicator to analyze the impact of fiscal decentralization on regional economic development. In 2006, the average economic growth of the region was 4.75 percent. In this year, there were 7 provinces were under the average and the 26 provinces were above average. In 2007, the average regional economic growth increased to 5.6 percent. There were 10 provinces that were below average and the 23 provinces were above average. By comparing with the performance of the national economic growth, there were 18 provinces that have economic growth rates above the national economic growth, 6.28 percent in 2007. South Sulawesi Province has the largest economic growth rates reached 11.2 percent. In 2008, the national economic growth has dropped to 6.06 percent. In this year, there were 11 provinces that were above the national economic growth. Papua Province is the highest reached 38.2 percent. The fluctuations of regional economic growth is determined by many factors, among others; economic and political conditions in the region, the potential of human resources, natural resources, and the effectiveness of regional financial management.
The success of fiscal decentralization also highly depends on the effectiveness of budget (APBD) expenditure policy. Expenditure of APBD has a very important role in the implementation of regional governance. Effectiveness of budget expenditures will directly influence the effectiveness of public services, which in turn will determine the success of regional development. Effectiveness of budget expenditure is influenced by internal factors and external regional government. Internal factor includes budget formulation process, the role of community participation, political support from the Parliament, while external factor such as synergy between regional programs and central government programs. These factors are still challenge for regional governments to realize. Budget formulation process is a challenge because the budget formulation process is not a simple process. This process is related to the planning mechanisms involving various parties with widely divergent interests. The challenge is how to create a clear relationship between inputs (budget in APBD) and outputs and out-comes of programs and activities. Budgets are just an end of the planning.
Community participation and political support is also crucial to the effectiveness of budget expenditures because these two elements determine the outcome to be achieved and at the same time assess whether regional governments have been successful. Another challenge is the external factor is how to create synergy between the programs and activities at the national level and regional policies. Expenditure budget becomes ineffective if not in line with national development programs, or vice versa. This is not a simple way to create synergy between programs and activities at various levels of government.

CONCLUSION
First, the trend of State government expenditure during the era of regional autonomy and decentralization shows the central government expenditure tends to decreased and the transfer expenditure tends to increased. The transfer has increased significantly every year in absolutely, but annual growth rate fluctuated considerably. This means that during the period of decentralization, the allocation portion of the transfers into the region was unstable. The fund balance is the largest component of transfers to the region which showed a significant increase every year and general allocation fund (DAU) is the largest components of fund balance. Second, regional government expenditure for both provinces and District/City is more dominated by indirect expenditure than direct expenditure.
Third, degree of fiscal decentralization for districts/city shows increased for two years (2007)(2008). The same thing for the province, the degree of fiscal decentralization is also showing signs encouraging enough. These mean that regional government's ability to finance their functions have encouraged. However, by looking at the development of direct and indirect expenditures, fund allocation for indirect expenditure is still bigger than direct expenditure.
Fourth, the success of fiscal decentralization highly depends on the effectiveness of budget (APBD) expenditure policy. Expenditure of APBD has a very important role in the implementation of regional governance. Effectiveness of budget expenditures will directly influence the effectiveness of public services, which in turn will determine the success of regional development.
Fifth, it is recommended to regional government (district/city and province) to improve public finance management and also to allocate bigger their budget for public interest than for government administration.