Structure of local government budgets and local fiscal autonomy: Evidence from Indonesia

Abstract

This study aimed to investigate the critical aspects of Indonesia’s local government budget structure. The impact of the budget on local fiscal autonomy was also examined by separating the sample of provinces in Java Island and Bali versus Non-Java Island and Bali. The unbalanced panel data was collected on 34 Indonesian provinces from 2013 to 2020. The results showed that locally-generated revenue and general allocation funds positively affect the regional fiscal autonomy index. These results indicate that local revenue and general allocation funds have improved regional fiscal autonomy. When the provincial sample is separated, general allocation funds positively and significantly affect the regional fiscal autonomy index in the provinces of Java Island and Bali. Furthermore, locally-generated revenue, as well as general allocation and profit-sharing funds, play a significant role in increasing the regional fiscal autonomy index in provinces outside Java and Bali, such as Sumatra, Kalimantan, Sulawesi, and Papua. These findings suggest that different geographical conditions and infrastructure have varying effects on encouraging regional fiscal autonomy. This study invites policymakers to address the strengthening of regional authority to explore income sources and budgeting quality and evaluate intergovernmental fiscal relationships. AcknowledgmentThe authors express gratitude to the three anonymous reviewers and seminar attendees at Mulawarman University for their insightful comments.