Has Fiscal Reform Really Made Local Governments Stronger?

Reflections from Lampung Province

Indonesia has spent years talking about decentralization. The idea is simple: local governments should have more authority and flexibility to manage their own development. One of the most recent efforts to achieve this goal is Law No. 1 of 2022 on Central–Regional Fiscal Relations, commonly known as the HKPD Law.

This law was introduced with big promises—reducing dependency on central government funding and improving public services. But beyond the policy language, a basic question remains: has this reform actually made local governments more independent?

Examining Lampung Province provides a useful way to reflect on this question.

Why Fiscal Independence Matters

Fiscal independence may sound technical, but its impact is very real. When local governments rely heavily on funds from the central government, their ability to respond to local problems becomes limited. Budget decisions often take longer, priorities are shaped from above, and public services can become less responsive to community needs.

In Lampung, the central government transfers accounted for more than two-thirds of the total regional revenue between 2019 and 2024. This level of dependency highlights the challenges faced by local governments in operating independently, even within a decentralization framework.

What Has Improved Since the HKPD Law?

Since the HKPD Law came into effect, there have been encouraging changes, especially in public services. Education outcomes in Lampung have improved, particularly in terms of expected years of schooling. This suggests that local governments are beginning to allocate education budgets more carefully, focusing on areas that need the most attention.

The most visible improvements, however, have occurred in the health sector. Better distribution of healthcare workers and improved coordination between facilities and staffing indicate that local governments are using their fiscal space more effectively. These changes are significant because they directly impact people’s access to essential services.

The Problem That Still Remains

Despite these service improvements, one major issue remains unresolved: local revenue is still weak. Local own-source revenue has increased only slightly and is not enough to significantly reduce reliance on central transfers. This highlights deeper structural issues, including inefficient tax systems, low compliance rates, and limited adoption of digital tools at the local level.

As a result, fiscal dependency has not declined in the short term. This does not necessarily mean the policy has failed. Instead, it shows that building fiscal independence takes time. Legal reform alone cannot change long-standing institutional and administrative challenges overnight.

People Feel the Impact Before Budgets Do

Interestingly, while fiscal indicators have moved slowly, social outcomes have improved more noticeably. Lampung has seen progress in human development and a reduction in income inequality. This suggests that better education and health services can improve people’s lives even before local governments achieve full fiscal independence.

In other words, citizens often feel the benefits of reform before the financial structure fully reflects it.

What Should Be Done Next?

If the goal is genuine local independence, fiscal reform must be followed by stronger implementation. Local governments need better systems to collect revenue, smarter spending priorities that focus on productive sectors, and targeted programs for regions that are still lagging behind.

Without these efforts, decentralization risks becoming a formal policy without meaningful autonomy.

A Final Reflection

The HKPD Law demonstrates that fiscal reform can enhance public services, but it also highlights the limitations of regulation without adequate capacity. Lampung’s experience reminds us that decentralization is not just about changing laws—it is about strengthening institutions, improving governance, and maintaining long-term commitment.

If Indonesia wants local governments to stand on their own, fiscal reform must be treated not as a one-time policy change, but as a continuous process that puts people, not just budgets, at the center.