| Indonesia introduced fiscal desentralisation when the central government enacted Law No. 25/1999 on fiscal balance between the central government and the local governments. This law was later revised as Law No. 33/2004 and is widely known as the ‘new direction of fiscal relationship’ which guides the intergovernmental financial relationship between central and local government in Indonesia (Brojonegoro & Asanuma, 2003; Suharyo, 2009). According to the law, local governments have two major sources of revenues to finance their expenditures: own-source revenues and intergovernmental transfers. Own-source revenues are revenues raised by local governments from their local sources, consists of taxes, levies, proceeds from the management of regional assets set aside for the purpose, and other source of revenues. While intergovernmental transfers consist of Revenue Sharing from natural resources and taxes, General Allocation Funds (Dana Alokasi Umum, or DAU), and Specific Allocation Funds (Dana Alokasi Khusus, DAK). The fiscal desentralisation law established principles on the intergovernmental financial relationship between central government and local governments, which take the forms of devolution, deconcentration, and co-administration of tasks. Through those forms, most authority and responsibility of the central government was devolved to local governments, including the financial responsibility over the provision of public goods and services at local levels. |