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Improving the Efficiency of Public Spending on Health and Education in Indonesia

March 8, 2023

By Saeful Muluk and Ronaldo Octaviano

Indonesia has seen first-hand the link between government spending on public services and the well-being of its citizens. Public spending on health and education has been shown to increase economic growth, improve health outcomes, and reduce poverty.

When Indonesia’s constitution was amended after the democratic transition in 1998, a new provision was added mandating that 20 percent of national and subnational budgets be allocated to education. The introduction of government decentralization in 2001 also assigned greater responsibility for health and education spending to subnational governments. New legislation was adopted requiring adequate subnational government spending. The 2003 National Education System Law requires subnational governments to allocate 20 percent of their budgets to education, while the 2009 Health Law stipulates that 10 percent of spending be allocated to the health sector.

To back these efforts, the USAID ERAT program (ERAT: “effective, efficient, and strong governance”), which The Asia Foundation implements in partnership with the International City/County Management Association, facilitated the collaboration of several key ministries on the new Minister of Home Affairs Regulation No. 84 of 2022. This regulation will introduce a more consistent and mutually agreeable standard for monitoring and recording subnational government expenditures against mandatory spending targets in health and education. All subnational governments are required to follow the regulation as they prepare their 2023 budgets.

A boy in a school uniform raises his hand in a classroom.

A primary school scene in Luwu Utara District, South Sulawesi Province. (Photo: USAID ERAT)

Regional disparity in compliance

Subnational governments vary significantly in their spending on health and education. When USAID ERAT reviewed provincial and district government spending between 2017 and 2019, we found that provincial governments spent, on average, 32 percent of their budgets on education. Only three of Indonesia’s 34 provinces failed to meet the 20 percent constitutional minimum: West Papua (11.8 percent), North Kalimantan (18.9 percent) and East Kalimantan (19.5 percent).

Meanwhile, at the district level, average spending on education was 25 percent, but 102 of Indonesia’s 514 districts failed to meet the 20 percent minimum spending target. In fact, half or more of the districts in less-developed provinces like West Sulawesi, Maluku, North Maluku, West Papua, and Papua missed the target. By contrast, average district spending in the five provinces of Java is the highest in Indonesia, at more than 30 percent, with almost two-thirds of districts spending more than 30 percent of their budgets on education.

In the health sector, USAID ERAT found that 22 of Indonesia’s 34 provinces did not meet the 10 percent mandatory spending target. At the district level, however, 90 percent of district governments allocated at least 10 percent of their budgets to health. On average, districts spent 15 percent of their budgets on health, with only 51 districts allocating less than 10 percent to the sector. Most districts in Lampung, North Kalimantan, Papua, and West Papua failed to meet the 10 percent mandatory spending target.

A woman in a medical mask sits at her desk she assists a client.

Taking care of health insurance in Barru District, South Sulawesi Province. (Photo: USAID ERAT)

Toward more consistent spending

Both the Ministry of Home Affairs and the Ministry of Finance monitor subnational government budget allocations, but because they historically lacked the means to sanction subnational governments for noncompliance, they have sometimes struggled to get subnational governments to follow up on their recommendations.

The ministries collaborated to resolve this issue, passing Government Regulation No. 12 of 2019 on regional financial management. This regulation states that if subnational governments do not meet mandatory spending targets, the Ministry of Finance will delay or cut its regular transfers of funds to the districts—so-called General Transfer Funds. This system of sanctions was implemented for the first time in 2021.

Two years after being adopted, the new sanctions regime appears to have succeeded in increasing compliance with mandatory spending targets. A 2022 Ministry of Finance evaluation found that just 63 of Indonesia’s 548 subnational governments had not met mandatory education spending targets, and only nine had not met health spending targets. This was a significant improvement from 2021, when 124 subnational governments did not meet education spending targets and 160 did not meet health targets.

Two young girls stand together. One girls receives a new school uniform.

A girl receives a new uniform at a school in Makassar, South Sulawesi Province.(Photo: USAID ERAT)

Disputes and collaboration

Unsurprisingly, delaying General Transfer Funds provoked strong reactions from subnational governments. The Ministry of Finance relies on a range of existing regulations and its own framework for determining which expenditures count toward mandatory spending targets, and some subnational governments disputed the ministry’s classification system. Subnational governments also questioned the different frameworks used by the Ministry of Home Affairs, the Ministry of Education and Culture, and the Ministry of Health to classify and calculate subnational government spending.

Officials in the Ministry of Home Affairs, the Ministry of Finance, the Ministry of Health, and the Ministry of Education and Culture recognized the need to develop a mutually agreeable framework. USAID ERAT facilitated their collaboration to develop the framework, and their different viewpoints were incorporated into Ministry of Home Affairs Regulation No. 84 of 2022, “Guidelines for the Preparation of 2023 Subnational Budgets.” As noted, all subnational governments will be required to adhere to these guidelines as they prepare their budgets.

Of course, meeting spending targets will not be sufficient by itself. Improving the quality of spending, ensuring that it is directed toward the areas of greatest need and spent on programming rather than administration or other internal costs, and reducing opportunities for corruption are also critical. But the new regulation is an important step toward meeting mandatory health and education spending targets and helping to ensure that every Indonesian citizen gets the basic services they deserve.

Saeful Muluk is a public financial management specialist, and Ronaldo Octaviano is a program data analyst, for USAID ERAT in Indonesia. They can be reached at [email protected] and [email protected], respectively. The views and opinions expressed here are those of the authors, not those of The Asia Foundation.

Related locations: Indonesia
Related programs: Good Governance

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