Fiscal Power Recentralizes as Regional Transfers Fall 24.8%
Main Takeaways
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JAKARTA, Investortrust.id — President Prabowo Subianto’s government sets regional transfers at Rp 650 trillion, equal to $40.6 billion, in the 2026 draft budget on Friday, Aug 15, 2025, a 24.8% cut that narrows local fiscal space. At the same time, central government spending rises 17.8% to Rp 3,136.5 trillion, equal to $196.0 billion.
Senior researcher at the Centre for Strategic and International Studies (CSIS), Deni Friawan, said the shift reflected a trade-off that highlighted the return of fiscal centralization.
“The trade-off is that fiscal space for the regions becomes much smaller,” Deni said during a policy discussion titled “RAPBN 2026: Weighing Political Promises Amid Fiscal Constraints” at CSIS headquarters in Jakarta on Monday, Aug 18, 2025.
Local Fiscal Space Narrows
Deni explained that the spending structure for 2026 indicated that most programs would be managed directly by the central government. Regional governments, in turn, would be left with allocations from the General Allocation Fund (DAU) and the Special Allocation Fund (DAK).
“The role of regional governments will shrink in line with the cut in transfers, which narrows their fiscal space,” he said.
Budget documents show that spending by ministries and institutions is set at Rp 1,498.3 trillion in 2026, a 17.8% increase, while non-ministerial expenditure will reach Rp 1,638.2 trillion, up 18%.
Deni noted that 70% of regional governments rely heavily on transfers. With less funding, many may turn to higher local taxes to compensate. He cited the case of Pati Regency, which raised its land and building tax by 250% after transfer allocations were reduced.
Old Problem of Decentralization
CSIS Executive Director Yose Rizal Damuri said the reduction in transfers exposed the structural weakness of Indonesia’s decentralization model. While local governments had been granted responsibilities for governance and spending, they lacked authority to raise revenues.
“There is no decentralization of revenue,” Yose said.
He noted that the rollback of local functions had begun under former President Joko Widodo and was continuing under Prabowo Subianto. “This time it is very explicit in the 2026 budget,” he added.
Government Defends Policy Shift
At the budget presentation, Home Affairs Minister Muhammad Tito Karnavian confirmed that a portion of regional transfers had been redirected to central ministries.
“Transfers are partly shifted to the central government and spread across ministries,” Tito said at the Directorate General of Taxes office in Jakarta on Friday, Aug 15, 2025.
He explained that the reduction would be offset by 16 central programs worth Rp 1,376.9 trillion, which are expected to benefit local communities. Coordination, he said, would focus on regions with low local revenues.
Tito acknowledged that local governments depend mainly on retributions, central budget allocations, and limited revenues from local enterprises. He encouraged regional administrations to be more creative in securing budget allocations.
Sri Mulyani Stresses Direct Impact
Finance Minister Sri Mulyani Indrawati said the public and local governments needed to understand the rise in central government spending. Under the 2026 budget framework, central government outlays reached Rp 3,136.5 trillion, up 17.8% from the 2025 outlook.
She argued that the reduction in Transfers to Regions and Village Funds would be compensated by ministries’ and agencies’ spending that is executed directly in the regions and flows to people on the ground.
“I believe the compensation from ministries and agencies [whose budgets are carried out in each region] must be increasingly coordinated with local governments,” Sri Mulyani said.
She urged ministers and agency heads to consistently convey and socialize their programs in the regions. “We will continue to coordinate with Minister Tito,” she said.
For regions operating below capacity, the central government would look for solutions so that basic public services and local government operations continue to run well. “We will continue to manage this within the available fiscal space,” she said.
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