|**Cities/Districts**|**DAU 2006**|**DAU 2007**|**DAU 2008**|**DAU 2009**|**DAU 2010**|**DAU 2011**|
|---|---|---|---|---|---|---|
|**DAU variable weight**<br>**Fiscal Need Variables**<br>|||||||
|**Index of population**|30.00%|30.00%|30.00%|30.00%|30.00%|30.00%|
|**Index of area**|15.00%|15.00%|15.00%|15.00%|13.25%|13.50%|
|**Index of construction**<br>**price index**|30.00%|30.00%|30.00%|30.00%|30.00%|30.00%|
|**Index of inverse of HDI**|10.00%|10.00%|10.00%|10.00%|11.00%|10.00%|
|**Index of inverse per**<br>**capita GRDP**|15.00%|15.00%|15.00%|15.00%|15.75%|16.50%|
|**Fiscal Capacity Variables**<br>|<br>||||||
|**Own source revenue**|100.00%|75.00%|75.00%|70.00%|93.00%|93.00%|
|**Tax revenue sharing**|100.00%|75.00%|75.00%|73.25%|100.00%|80.00%|
|**Resource revenue**<br>**sharing**|100.00%|50.00%|50.00%|100.00%|100.00%|63.00%|

Source: Ministry of Finance, Government of Indonesia

# **DAU – An Evaluation**

In the interest of tax harmonization, limiting differentials in sub-national fiscal capacities and lowering tax administration costs, Indonesia has adopted a highly centralized tax system with the Central Government raising 91% of total revenues. This creates a large vertical fiscal gap (almost 90%) that is filled by revenue sharing and transfers. Revenue sharing by origin while reducing vertical fiscal gap accentuates horizontal fiscal inequalities. DAU is the foremost program to bridge horizontal inequities. It is an objective formula based transfer program that partially compensates for civil service wages and partially tries to limit the differentials the fiscal capacity across jurisdictions by focusing on reducing the variations in regional allocation of transfers as measured by the weighted coefficient of variation. This results in reducing overall inequality in fiscal capacities and some redistribution of income across provinces and cities and districts as shown by Eckardt and Shah (2007). However, the current program has a number of important limitations.

_One size fits all approach leads to fiscal inequity._ The foremost concern is that the program equalizes jurisdictions with widely dissimilar responsibilities and characteristics. This is especially true when you group metropolitan areas, cities of varying population sizes and rural municipalities or districts of varying geographical areas as done under the current program. This violates the most fundamental dictum of transfers that ―one size does not fit all‖. The Constitutional Court of Indonesia in South Sulawesi case had earlier ruled that, ―Uniform treatment of different entities causes injustice‖. Indeed it would be a travesty of justice to consider that a small town with a tiny population such as Kabupaten Puncak has the similar fiscal needs and capacities as a large city like Kota Bandung or for that matter a small district in terms of area, Tangaran has similar revenue means and expenditure needs as a large district of Tangerang. The existing program ignores the fiscal capacity or fiscal need differentials of various size and class of municipalities and assumes that they all have equal per capita needs and revenue means other than from those factors explicitly considered in the formula. If one examines local finance in other countries, there are wide justifiable variations in per capita revenues and spending across various size and urban/rural class of municipalities in view of the diversity of needs and preferences and responsibilities. Equalizing unequals leads to injustice 7