5 - COVID-19: Impact on the Finance and Delivery of Local Public Services in Indonesia

Summary

Abstract

We examine the potential effects of COVID-19 on district government revenues, district and household spending, and ultimately local public service access. We find that the government forecasted decrease in economic growth and knock-on effects on central government budget revenues might lead to a 5.5 per cent decline in district intergovernmental transfer revenue, a 6.0 per cent decrease in district spending and a 7.5 per cent decrease in household spending. We estimate that the combined downturn in district and household expenditure would result in a 2 percentage point reduction in household access to local services from the projected baseline, a modest impact. We conclude that while COVID-19 may have a significant negative impact on local public services it will likely not derive from districts’ reduced access to funding or lower household spending. Central government has already organised a program of conditional cash transfers to needy households and this may help dilute any negative service effects related to declining household expenditure. Some observers have argued for a large increase in intergovernmental grants to combat the adverse effects of falling district spending. We do not advocate this approach, given the longstanding ineffectiveness of districts in using their considerable fiscal resources to enhance local service delivery.

Introduction

COVID-19 continues to have severe negative health and economic impacts across the vast majority of countries in the world. Indonesia has not escaped these destructive effects. As of this writing, Indonesia has experienced 320,000 cases of COVID-19 and 11,500 related deaths. Many observers believe these figures significantly underestimate the reality. Indonesia has not yet managed to ‘flatten the curve’ and COVID-19 cases and associated deaths are increasing at a rapid rate. COVID-19 is expected to have a large negative effect on economic growth in 2020 and possibly beyond into 2021. The Ministry of Finance estimates that the economic growth rate in 2020 may drop to between 2.3 per cent and −0.4 per cent from about 5.0 per cent in 2019.

COVID-19 will also likely have a substantial negative impact on local public service delivery, especially in the education, health, and water and sanitation sectors. Hard data are difficult to come by at this stage, of course, but anecdotal evidence confirms the expected adverse effects.