The new fiscal decentralisation policy and the size of government in Indonesia

Abstract

The decentralisation policy has provided alternatives for mobile factors to choose an area. As these factors move freely, regions are forced to compete to attract these factors. However, since the local government dependence on the central government financing remains high, the new interregional fiscal transfer could create a fiscal illusion that increases government size. Furthermore, as regional spending is beyond its revenue capacity, regions with limited resources and/or capacity to generate local revenues might have the incentives to behave as free-riders or to show collusive behaviour is necessary.