(Civil Service) Budgetary Transfers to Regions

The 24/8 edition of Kompas carried an item on the effectiveness of increased State budget (APBN) fiscal transfers to regions of Rp 518.9 trillion—31.3% of total APBN expenditure— in 2013, much of which, according to Coordinating Minister of Economic Affairs Hatta Rajasa, would be absorbed by civil service costs.

Research conducted by the Indonesian Forum for Budget Transparency (FITRA) revealed that in 2011 124 regions allocated more than 50% of their budgets for civil service costs.  In 2012 that number rose to 302: indeed, 16 regions allocated over 70% of their budgets to meet bureaucratic costs.  Such patterns of budgetary spending make it difficult to achieve the fundamental aim of regional autonomy—now in place for more than a decade—viz., to enhance public welfare by bringing public service delivery closer to the people.

We have not arrived at this situation all of a sudden because of bad budget management on the part of regional governments: Flaws in the fiscal decentralization system and inconsistent central government behaviour have contributed to this state of affairs in which regional governments allocate more for the benefit of public service deliverers than on the actual delivery of public services.

 It is well known that, on average, regions depend for 80% of their budget income on transfers from APBNs and that most of those transfers are in the form of funding for civil service costs.  Thus, given that the basic component of the General Allocation Fund (DAU) is designed to cover regions’ civil service funding requirements, regions don’t think twice about recruiting and paying for additional civil servants.  Indeed, the formula used to calculate DAU transfers lulls regions to sleep, as it were, and encourages them to propagate even more autonomous regions.  If anything, the formula provides incentives to regions increasing civil service costs and disincentives for those that reduce them; after all, reducing such costs also reduces a region’s share of DAU allocations.

 The bulk of regional fiscal transfers in State budget 2013 are to be directed at meeting civil service costs: Rp 306.2 trillion in the form of DAU transfers (59% of total transfers); Rp 43.1 trillion as professional allowances for teachers (8%); and Rp 2.4 trillion as additional income for teachers (1% of total transfers).  Thus, in practice, regions can hardly be expected to lift the level of their 2013 budget allocations for capital expenditure or public service delivery.

 Almost every year, when presenting its annual financial statement, the government claims that fiscal transfers to regions have continued their upward trend. But, in fact, from one year to the next such transfers continue to remain at around 31% of total APBN expenditure.  Assuming an economic growth rate of 6.8% and inflation of 4.9%, an 8.4% increase in the level of fiscal transfers to regions does not amount to a significant change in real terms.

 The principle “money follows functions” is being turned on it head in the case of fiscal transfers to regions: regions are responsible for 31 government functions—amounting to 70% of total government business—but budgetary resources transferred to regions only amount to around 30% of total APBN expenditure.

 The government has also been inconsistent in its approach to redirecting funds advanced to regions for centrally delegated functions or tasks jointly administered by the Center and regions, by changing them into fiscal transfers to regional budgets for expenditure on functions that now amount to local government responsibilities.  Law No. 33/2004 concerning Fiscal Balance Transfers from the Center to Regions—specifically Article 108 on transitional arrangements for the new lawclearly states that funding for delegated or jointly administered functions should be progressively brought under the umbrella of the Special Allocation Fund (DAK); it also directed that enabling legislation should be issued to effect that change.  But Article 108 has not been seriously implemented: It took four years for the enabling legislation (Government Regulation No. 7/2008) to appear and, when it did, it still merely stated that the switch to the DAK should be made progressively.  FITRA’s research in 2011 unearthed no evidence that funding for either delegated or co-administered functions was being switched to the DAK; on the contrary, both streams of funding have been trending upwards each year.

There has also been a lack of equity in the way the central government has been applying the DAU formula: This has resulted in a shortfall in DAU funding that regions should by right have been receiving.  Article 27 of Law No. 33/2004 prescribes that overall DAU funding should be at least 26% of net domestic revenue; the law’s explanatory notes describe “net domestic revenue” as State revenue deriving from tax and non-tax sources less revenue shared with regions via the Revenue Sharing Fund (DBH).  But, in fact, since 2008 the DAU funding pool has been reduced by deducting not only DBH funds but also subsidies and “earmarked” revenue.

In the 2013 State budget, for example, the government has subtracted the following from net domestic revenue for DAU purposes: components of non-tax revenue of ministries and agencies identified (“earmarked”) for re-use; taxation subsidies; and 60% of other subsidies.   This has resulted in Rp 306.2 trillion being transferred to regions via the DAU in 2013 (p. 308 of Financial Statement accompanying draft 2013 APBN).  But, if government faithfully adhered to the formula laid down in Law No. 33/2004, the figure should actually be Rp 390.8 trillion—Rp 84.6 trillion more than the budgeted amount. Regional governments and the House of Representatives should be able to pressure government to make good that difference to ensure provisions of law are met.

It is not appropriate that the central government simply blame regional governments for the shortcomings of the fiscal decentralization system and rest easy on its commitment to fostering fiscal decentralization, unless it modifies its own decentralization model and consistently implements its own fiscal decentralization policies.

Yuna Farhan

Secretary-General of FITRA/co-author of the Alternative APBN for 2013

prepared by the Civil Society Coalition for Welfare-Based APBNs

 August 2012


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