Fiscal Capacity Matters: Heterogeneous Revenue Effects of Intergovernmental Fiscal Reform in Indonesia
Keywords:
Fiscal Capacity, Local Revenue, Intergovernmental Fiscal Reform, Fiscal Decentralization, IndonesiaAbstract
Indonesia continues to experience persistent disparities in regional fiscal capacity, which constrain local governments’ ability to optimize own-source revenues. This study analyses the impact of the Law on Financial Relations between the Central and Regional Governments (HKPD Law) on Local Taxes and Retributions Revenues (LTRR), with an emphasis on the role of regional fiscal capacity. Using panel data from 209 regencies and municipalities in 10 Indonesian provinces for 2019–2024, regions are classified into high- and low-fiscal-capacity groups. This study offers a novel contribution by explicitly examining the heterogeneous impact of fiscal decentralization reform based on regional fiscal capacity using a causal Difference-in-Differences (DiD) framework. The results show that the HKPD Law positively affects LTRR. Regional fiscal capacity is a key determinant of revenue performance, with stronger effects observed in high-capacity regions. These findings indicate that the effectiveness of fiscal decentralization reforms depends on regional fiscal capacity. The findings provide important policy implications for designing differentiated fiscal decentralization strategies, particularly in developing countries, to ensure more equitable fiscal outcomes and sustainable regional fiscal autonomy.
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