THE IMPACT OF GOVERNMENT’S TRANSFER FUND TO THE LOCAL OWN-SOURCE REVENUE

Abstract

Despite more than two decades of fiscal decentralization, most local governments in Indonesia remain highly dependent on intergovernmental fiscal transfers. This condition raises concerns regarding the effectiveness of transfer mechanisms in strengthening local fiscal capacity and promoting revenue mobilization. This study examines the effects of four major transfer instruments—General Allocation Funds (DAU), Special Allocation Funds (DAK), Revenue Sharing Funds (DBH), and Village Funds (DD)—on local own-source revenue, specifically local tax and local retribution revenues, across Indonesian regencies and municipalities. Using a balanced panel dataset of 412 regencies and municipalities during the 2015–2022 period, this study employs a Fixed Effects Model (FEM) with Panel-Corrected Standard Errors (PCSE) to address heteroskedasticity and autocorrelation issues. The analysis investigates whether fiscal transfers generate a crowding-in effect by enhancing local revenue collection or a crowding-out effect by reducing local fiscal effort. The results reveal heterogeneous impacts across transfer types. DAU has no significant effect on local tax revenue but positively affects local retribution revenue. DAK consistently exhibits positive and significant effects on both local tax and retribution revenues, indicating that conditional transfers can strengthen local revenue-generating capacity. In contrast, DBH negatively affects both local tax and retribution revenues, suggesting the presence of a crowding-out effect and potential dependence on transfer revenues, particularly in resource-rich regions. Village Funds do not significantly affect local tax revenue but negatively affect local retribution revenue.