The Impact of Fiscal Decentralization towards Income Inequality in the Eastern Region of Indonesia

Abstract

Inequality in income distribution is one of the most important problems in each country, especially in developing countries. The high inequality of income distribution is an indicator of low social welfare. Because of that, the income inequality problems must be resolved. In Indonesia, the Eastern Region has a higher income inequality than the Western Region. The government has implemented various programs to reduce income inequality in Indonesia, including fiscal policy. This research aims to analyze the influence of profit sharing, special allocation, general allocation, capital expenditure, and village funds on income inequality in Eastern Indonesia in the short and long term. The data used is panel data on ten provinces in the Eastern Region of Indonesia from 2012 2023 and sourced from the Ministry of Finance. The analysis technique used is the Generalized Method of Moments (GMM) analysis. According to the GMM test, profit sharing and village funds negatively impact income inequality in the short and long term. In the short term, profit sharing funds can reduce income inequality by 0,0055 percent; in the long term, they can reduce it by 0,012 percent. Then, the village funds can reduce the income inequality to 0,02 in the short term and 0,05 in the long term. While general allocation funds, special allocation funds, and capital expenditure do not significantly affect income inequality in the short and long term. Based on this result, it is known that the balancing funds provided by the central government to the local government have yet to be fully able to reduce the income inequality in the Eastern Region of Indonesia. The implication of this study to local governments, particularly those in the Eastern Region of Indonesia, is that local governments should increase the optimization of general allocation funds, specific allocation funds, and capital expenditure to reduce income inequality. Then, profit sharing and village funds must also improve residents' welfare and reduce income inequality.