Indonesia's Omnibus Law and Fiscal Decentralization

In the amid of the pandemic, the government is not slowing down the deliberation on the controversial omnibus bill. In fact, the government was expecting that the bill could be passed by the end of the year 2020 to accelerate the country’s investment recovery.

Pros and cons emerge as the bill is being discussed. On one hand, the pros argue that this bill is going to increase the easiness of doing business in the country, resulting in a better investment climate. On the other hand, the cons mostly concern about how the bill will affect the livelihood of Indonesian workers. 

Another interesting topic which is rarely highlighted is how the omnibus bill can alter Indonesia’s decentralization system. It is important to put this topic in the spotlight since decentralization plays an important role in Indonesian integration. We must not forget that our “big bang” decentralization in 2001 was a response to what was perceived as over-centralization prior to 1998. It was the answer to the rising threats of secessionism and separatism following the 1998 economic crisis. Therefore, any discourse affecting the system should be studied carefully before turning it into a ruling.

How this bill affects our decentralization system?

The omnibus bill will reshape Indonesia's decentralization system, especially in the field of tax assignment and central-local regulatory coordination. The omnibus bill will not completely cancel Law Number 28/2009. It only adds or removes some parts of the law. Thus, the closed list regime is still in place. However, the central government may force a single rate on local taxes and charges, instead of placing a maximum limit like the current regime.

The central power over local tax rates and incentives deteriorates the independence of the local governments in raising their own-source revenue. It could decrease the proportion of original local own revenue in a local government revenue structure, leading to a higher intergovernmental transfers dependency, which is already high in regency/city level (>60 percent of the total revenue). Without revenue-raising responsibilities, local governments will be less accountable to their voters. 

Too much dependency on national-local transfers may also tempt the central government to use its spending power too intrusively and too heavily in influencing local governments’ spending priorities. In the long term, it would adversely affect the ability of the local governments to plan and budget their programs. In the end, as Richard Musgrave said, the over-reliance on intergovernmental transfers would subtract the essence of decentralizing expenditure responsibilities to the local governments.

In addition, the bill strengthens the ex-ante mechanism in preventing local’s harmful regulations from being passed. It puts the central government in a favorable position to influence local government regulatory process. The central, represented by Minister of Internal Affairs and Minister of Finance, is in a stronger position to form the discussed provision draft to include the national government’s interests. If the draft is deemed to conflicting higher statutory regulations and national fiscal policies, the draft should be adjusted to the evaluation results carried out by the central government. As a result, all local provisions will blindly follow what the central wants, blurring the essence of “locals know better” and disregarding the unique locality. A balanced central-local relationship in the regulation development process is needed to ensure that local governments have enough opportunity to shape the regulations which they will enforce.

Watch for the pitfalls

        The omnibus bill is without a doubt could be a short route for a better investment climate in the country. However, together with the labor issues, the government should consider its impacts on the central-local relationship. A weakened decentralization system could possibly lead the country back to the centralization regime, a regime which we wished to reform more than two decades ago. The history shows that decentralization in Indonesia is not only about an effective and efficient public service delivery, but it is also what binds the country together, keeping the multicultural country from disintegration. Therefore, due to the important role in uniting the multi-ethnicity country together, the discussion of the bill should also cover the effects of the provision on the decentralization.