ABSTRACT
This chapter explores the relationship between intergovernmental transfer and various types of spending at the local level. By international standards, the extent of intergovernmental transfer in Indonesia is quite high. Policies of fiscal decentralization that heavily use intergovernmental transfer are considered a second-best approach. This is given that the premise of high accountability of a decentralized system required both expenditure autonomy as well as tax autonomy. Intergovernmental transfers from the central government to provinces cover around 40-50 per cent of total provinces revenues, while in the case of local governments, the share of intergovernmental transfers on total local government revenues is more than 80 per cent. Intergovernmental transfers become a dominant source of revenues to both provinces and local governments given it is a chosen policy following up functional assignments across the level of governments that gives more authority to lower-level governments. DAU have positive effect both on capital and routine expenditures.
