Mobilizing local government revenues and 2024 local tax performance

As a decentralized and multi-tiered system of government, lower-level governments in Indonesia play major role in delivering basic services, ranging from education and health to local infrastructure projects such as roads, drinking water infrastructure, and sanitation. For the year 2023, out of a total general government spending of 3,476 trillion IDR, around 38.4% was spent by lower-level governments. In aggregate, the share of local government spending is higher than spending at the provincial level of government (Ministry of Finance, 2024a). The funding of local public goods and services can come from both intergovernmental transfers and local governments’ own-source revenues. For most local governments, the majority of these transfers come in the form of general equalization grants. Under the new Law on Central and Local Financial Arrangement, Law 1 2022, the pool fund for general equalization grants, previously mandated in the Law 33 2004, is no longer directly stated. Since 2017, the growth of overall intergovernmental transfers from central governments is below 10%, and there was a reduction in intergovernmental transfers during the COVID-19 Pandemic in 2020 (Ministry of Finance, 2021). Should there be limited fiscal respurces at the central level in the future, there could be a risk of declining intergovernmental transfer allocations. Although Indonesia’s policies on decentralization have primarily focused on expenditure decentralization, there has been progress in both devolution and granting local governments greater fiscal discretion. Therefore, the discussion of local revenue autonomy is important in understanding how local governments manage and are able to improve their local resource mobilization through own-source revenues, specifically by improvement in their local tax revenues. This policy brief aims to examine trends in local government revenues by assessing: - how local revenue patterns have evolved over time - revenue collection capacity – referring to the ability of local governments to generate and collect local own source revenues effectively over time - potential reforms to enhance local revenue mobilization. A specific focus of this brief is the review of local tax revenue collection performance in 2024. To note, we limit discussion on own-source revenues and local taxes at the third-tier level of government, referring to local governments: cities and municipalities in Indonesia.