FY 1997–FY 2003

Local Government Organization and Finance: Indonesia 237

percent in financial year (FY) 2000 to about 27 percent in FY 2001.In FY 2002,the subnational share rose to more than 30 percent ofthe total.If national spending on debt service is excluded,subnational expenditures accounted for more than 40 percent ofgovernment spending in FY 2002.In absolute terms,local government expenditures and revenues have also been on the rise.As can be seen from figure 7.1,local government expenditures more than doubled in 2001 in real terms and then rose by another 18 percent and 20 percent in 2002 and 2003.Law 33/2004 has increased the subnational share to a minimum of26 percent ofnet domestic revenue beginning in 2008. Provincial and local government shares ofthe total pool are not fixed in these revisions but will be regulated in a government regulation.

Perhaps more important than the quantitative changes are changes in the sources offinance.Before the recent decentralization initiatives,the central government relied heavily on earmarked grants to finance subnational recurrent and development expenditures.7 Transfers remain the main source oflocal government revenues,but the current system relies primarily on untied transfers over which local governments have full discretion.Specifically,the current revenue framework defines four principal revenue categories:(a) own-source revenues,consisting oftax and nontax revenues;(b) the balancing fund,consisting ofthe General Allocation Fund (Dana Alokasi Umum,or DAU) grant,the Special Allocation Fund (Dana Alokasi Khusus,

Rp trillion at constant 1997 prices

120 110 100 90 80 70 60 50 40 30 20

1997/98 1998/99 1999/2000 2001 2002 2003

total expenditure total revenue

Source: Authors’ chart based on data from Lewis and Pradhan 2005. Note: In 2000 the Indonesian government changed the dates ofthe fiscal year to be consistent with the calendar year. Fiscal years now start on January 1 and end on December 31. Prior to this change, both calendar years were given for each fiscal year, thus FY 1999/2000 refers to the fiscal year starting on April 1, 1999, and ending on March 31, 2000.

FIGURE 7.1 Local Government Expenditures and Revenues, FY 1997–FY 2003