The Formulation of Regional Financing Balance by Adding HDI: Strengths and Weaknesses

Roberto Akyuwen

Finance Training Center Jogjakarta, Ministry of Finance Republic Indonesia

Jl. Solo Km 11 Kalasan, Sleman, Yogyakarta 55571 INDONESIA

Telephone: 62-274-496219, Facsimile: 62-274-497235

E-mail: robertoakyuwen@yahoo.com, akyuwen@post.com

Abstract

Every year, Minister of Finance provides a recommendation about regional financing balance and distributes it to all other ministries. The recommendation will be used as a consideration in determining the target locations and activities financed by de-concentration and assistance funds. The de-concentration funds is taken from central budget and implemented by the governors as the representatives of central government. The assistance funds also granted from central budget, although at the regional level, it can be financed through province and regency/city budgets. Norms, standards, procedures, and criteria of de-concentration and assistance activities are determined by relevant ministries. The budget is expected to manage under the principles of efficient, economies, effective, transparent, and fair. All de-concentration and assistance activities should be planned holistically as a part of the national development planning system. The Minister of Finance has to ensure that the distribution of de-concentration and assistance funds will meet the targets and not concentrated in several regions only. As an input to the Minister of Finance, the Director General of Financing Balance have developed a formula which is used in determining the priority and non-priority regions as the target areas for the allocation of de-concentration and assistance funds. Since 2010, the formula has been completing by adding a Human Development Index (HDI) as an indicator of regional development variable. The other variable used in the formula is similar as before, that is the regional fiscal capacity which consisted of eights indicators. This research is aimed to analyze the strengths and weaknesses of adding HDI in calculating the regional financing balance. In addition, this research will also discuss the comparison of regional fiscal capacity and HDI among regions in Indonesia.

Keywords: regional financing balance, de-concentration funds, assistance funds, HDI, regional development, regional fiscal capacity.