Subnational Government Budgets and Resource Revenues in Indonesia: Indications of Resource Blessings?

Dec 2019 | 222

Authors: Ridwan D. Rusli, Wessel N. Vermeulen

We examine the economic consequences of resource extraction and the associ-ated revenue windfalls on subnational government revenues and spending patterns. Making use of Indonesia’s fiscal sharing rules and an offshore oil and gas produc-tion instrument, we find a positive impact of resource revenues on the center-local balancing funds including the general allocation fund, despite the latters’ fiscal re-balancing purposes. Fiscal windfalls from resource extraction increase public sector spending on capital and infrastructure projects as well as public goods and services, with positive spillover benefits on local tax revenues. At the same time spending on personnel and administration increases less and decrease as percentage of total expenditures. Interaction with district economic governance index data indicates enhanced infrastructure spending but also increases in the balancing funds.

JEL Codes: H71, O13, Q32

Keywords: Resource extraction; fiscal- and direct economic spillovers; decen¬tralization; subnational government budgets; South-East Asia; Indonesia

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