Fiscal decentralization and public expenditure

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5. Fiscal decentralization and public expenditure

Decentralization may be driven by fiscal concerns to align responsibility for services with the level of government best able to manage and mobilize resources for them. One danger then is that the national government uses this as an excuse to off-load expenditure responsibilities onto jurisdictions without recourse to potentially inflationary financing. While this could lead to a greater willingness to pay more local taxes because citizens perceive a direct link between taxes and service quality. Decentralization can also be driven by a desire to move services closer to the people. But success depends on how decentralization affects relationships of accountability. If decentralization just replaces the functions of the central ministry with a slightly lower tier of government a province or state, but everything else about the environment remains the same compact, management, and client power there is little reason to expect positive change. The assumption is that decentralization works by enhancing citizens’ voice in a way that results in improved services. Decentralization can strengthen accountability in two ways: between the center and a sub national government and within a sub national government. When local taxing and spending powers and central financing are well matched, decentralization can create checks and balances that hold sub national governments accountable for local services Dehn, Reinikka, and Jakob 2003. If local governments are equally or less vulnerable to captured, than the center decentralization is likely to improve both efficiency and equity Bardhan and Dilip 2002. World Banks 2002 argues that to make local governments l responsive to citizens, sub national governments should be assigned local tax instrument. Ideally, expenditures, revenue assignments, and transfers should be designed jointly so ends along with the freedom to set rates. That once set, additional demands can be met through taxes rather than grants. In addition to the democratization process, the slow economic recovery process is another circumstance that accompanied the decentralization process since 2001. While focus of the national government budget should be to overcome the crisis and maintain economic stability, at the same time national government budget has to dedicate some amount for new scheme of fiscal decentralization as mandated by Undang-Undang No. 25 year 1999. Fortunately, there were no significant negative effects on the national government budget created by that new scheme and most of local governments could understand that the relatively low amount of transfer is mostly due to heavy burden of national government budget rather than the lack of central government commitment in fiscal decentralization. On the other hand, the intergovernmental transfer scheme itself is still far from optimal due to heavy political interference especially in general allocation fund, natural resources revenue sharing, and tax revenue sharing. Local expenditure used in order to fund government matter that become province and regencymunicipality authority consist of obligatory matter, selection matter, and the matter handling by certain department which can be done together between local government definite by the determination of Undang- Undang. The structure of local expenditure consists of apparatuses expenditure and public expenditure. Public expenditure of obligatory matter fostering is li prioritized to keep and improve society life quality in order to perform local obligation that realized in a shape of basic service improvement, education, health, social facility, and public facility properly together with develop social warrant system.

B. Hypothesis Development