Fiscal Decentralization and Interprovincial Income Disparity In Indonesia

Abstract

Fiscal decentralization is the devolution of authority over public finance and services from central government to local governments. This authority devolution is followed by tax base sharing and intergovernmental transfer mechanism. This policy is carried out with a reason to reduce the fiscal gap that might occur, both among local governments as well as between central government and local governments. This study aims to determine the effect of fiscal decentralization policy on reducing interprovincial income disparity in Indonesia. To achieve this goal, empirical analysis is carried out using Ordinary Least Square (OLS) and panel data estimation (fixed effect – random effect estimation) on DAU and DBH per capita and Gini coefficient data of Indonesia’s 33 provinces during the period of 2007 to 2016. The results of this study indicate that fiscal decentralization policies have a significant effect in reducing interprovincial income disparity in Indonesia.