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Public spending is essential to achieving Indonesia’s growth and development goals. Spending on infrastructure, health and education are the foundation stones for Indonesia’s competitiveness. Public expenditure is also an important tool in preserving macroeconomic stability. Spending in Indonesia is low at 19 percent of GDP compared to the ASEAN average of 24 percent of GDP. In addition, the trade-off in allocations do not always reflect government priorities. Much of the national budget is tied up in administrative costs, leaving limited funding for infrastructure and social investments.
AIPEG pursues an integrated approach to improving expenditure policy, budget processes and service delivery:
- Budget policy: Support to prioritise spending and improve budget allocations for greater impact on economic growth.
- Budget frameworks: Assisting the government to enhance budget processes, including a medium-term budget framework for improved efficiency.
- Service delivery: Supporting reforms in public finances to improve service delivery.
Indonesia is increasingly distributing funds to the local level through budget transfers. However, there is limited accountability for meeting priority national objectives such as greater investment in infrastructure. This is particularly problematic for poor households who rely on local authorities to deliver connections to improved water and sanitation. Over 2015-16 AIPEG worked with the Australia Infrastructure Initiative to introduce performance-based budget grants into the 2016 Indonesian budget. The grant is modelled on the successful water and sanitation hibah (grant) program piloted under Australia’s infrastructure initiative where grants are paid to local governments based on expanding services to low income households.