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View all search resultsA call for a phased approach to fiscal decentralization
Lower government spending will reduce purchasing power, and increase unemployment and poverty.
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President Prabowo Subianto (center) gives a salute after addressing newly elected regional leaders during the last day of a week-long retreat at the military academy in Magelang, Central Java, on Feb. 28, 2025. (AFP/Aditya Aji)
T
he government’s decision to slash transfers to regional administrations (TKD) by Rp 269 trillion (US$16.3 billion) in the 2026 state budget raises a fundamental question: How can Indonesia pursue fiscal efficiency without undermining regional stability?
Why has the government chosen such drastic cuts in the 2026 state budget, despite the fact that development across Indonesia remains fragile and uneven? This decision is not merely an abstract figure. It represents the lifeblood of millions of citizens in the regions whose hopes and opportunities depend on continued local development.
For more than two decades, grants from the central government have served as the financial lifeline for many provincial and district governments. Regions with limited fiscal capacity rely heavily on these transfers to fund essential infrastructure, health care, education and poverty alleviation programs. The reduction constitutes a fiscal shock of historic proportions, particularly for regions still struggling with low growth, limited per capita income and persistently high unemployment.
The cuts will not only alter local balance sheets but also affect the pulse of local economies. Provinces in eastern Indonesia, such as on Nusa Tenggara, Maluku and Papua, will face the harshest blows, as their budgets are predominantly financed by central government grants.
First, infrastructure projects will stall. Roads, irrigation networks, sanitation facilities and rural electrification programs risk being abandoned, leaving remote communities further excluded from the national economy.
Second, public services will deteriorate. Education, health care and social protection programs, funded largely through TKD, face inevitable disruption. This threatens to widen inequalities between urban and rural areas.
Third, local economies will weaken. Small businesses and workers dependent on public projects will lose vital income streams. Lower government spending will reduce purchasing power, increase unemployment and push poverty rates upward.
