Governance capacity and subnational fiscal performance under decentralization: evidence from Indonesia

Fiscal decentralization has expanded the responsibilities of local governments, yet substantial disparities in fiscal performance persist across jurisdictions. This study examines how governance capacity influences fiscal performance and revenue sustainability within Indonesia’s decentralized metropolitan governance framework. Using panel data from seven local governments in the Gerbangkertosusilo metropolitan area during 2015–2024, the analysis develops a Composite Fiscal Performance Index (CFPI) that integrates revenue effectiveness, expenditure efficiency, fiscal autonomy, and revenue sustainability. The results reveal significant and persistent variation in fiscal outcomes. Jurisdictions with stronger governance capacity, particularly Surabaya City and Sidoarjo Regency, consistently achieve higher CFPI scores, reflecting more effective revenue mobilization, greater fiscal autonomy, and stronger expenditure management. In contrast, lower-capacity jurisdictions exhibit weaker fiscal performance, slower growth in own-source revenues, and greater dependence on intergovernmental transfers. Revenue forecasting further indicates that high-performing jurisdictions are more likely to sustain favorable fiscal trajectories over the medium term. By combining multidimensional fiscal performance measurement with forward-looking revenue sustainability assessment, this study contributes to the subnational public finance literature. The findings identify governance capacity as a critical institutional determinant of fiscal resilience and highlight the need for capacity-sensitive policies to improve the effectiveness of decentralized governance systems.