The government’s plan to slash regional transfer funds (TKD) in the 2026 Draft State Budget (RAPBN) has sparked concern across Indonesia. Local leaders warn that reduced fiscal support from the central government could strain regional budgets, disrupt basic services, and stall development projects.

Under the draft, TKD allocations are set at Rp650 trillion, a cut of Rp214.1 trillion (24.8%) from the 2025 outlook of Rp864.1 trillion.

“This will certainly weaken the fiscal capacity of local governments,” said Sarman Simanjorang, Deputy Chairperson for Regional Autonomy Development at the Indonesian Chamber of Commerce and Industry (Kadin), to SUAR in Jakarta, Wednesday (August 20).

Sarman explained that this reduction will also hinder development programs across various sectors, particularly in regions that are still largely dependent on central government transfers.

“The budget cut could affect the quality of public services and the local economic cycle, since local government spending serves as a stimulus for the private sector,” he said.

A similar view was expressed by Executive Director of the Committee for Monitoring the Implementation of Regional Autonomy (KPPOD), Herman Suparman. He said this could significantly impact regions that have long relied heavily on injections of funds from the central government.

“About 60%–70% of our regions, including cities and provinces, still rely on funds from the central government, known as transfers to regions, previously called balancing funds,” he told SUAR via phone.

He added that this inflow of funds makes local economies highly dependent on local government spending, which covers both operational and capital expenditures.

Herman compared the situation to the IDR 50.59 trillion budget efficiency measures implemented by the central government in 2025, which had already caused difficulties for local governments.

“We can see from the IDR 50.59 trillion cuts in 2025 that regions were already struggling, let alone next year when there is a reduction of 24.8%,” he said.

Strategy and innovation

So, what is the solution? According to the Chairman of the Association of All Indonesian Regency Governments (Apkasi), Bursah Zarnubi, a mature transition strategy is needed so that regions can continue to maintain the quality of public services and ensure equitable development.

He gave an example that the efficiency policy implemented at the beginning of 2025 was already difficult for regional heads to carry out their duties. So, if it is cut again, this will be very burdensome.

"We will bring the results of our discussion with the regents today to be put into a letter and a formulation, which will then be submitted to the President. The point is, we in the regions strongly object to any cuts in the regional transfer funds (TKD) in next year's state budget," said Bursah, who is the Regent of Lahat, as quoted from an official statement (9/8/2025).

In response to the central government's policy, Apkasi stated that it is open to dialogue with a comprehensive study involving various parties so that the impact of the adjustment of transfers to the regions can be assessed objectively.

"We are ready to be invited to a dialogue, and if necessary, a comprehensive study on the impact of the TKD cuts on the regions' capabilities should be carried out. An adequate transition mechanism is needed if this policy must be implemented. Most importantly, Apkasi is ready to maintain intensive communication and coordination between the central and regional governments," he said.

Bursah emphasized that adequate fiscal support is crucial, especially to ensure the smooth running of basic infrastructure projects—such as roads, schools, health centers, and irrigation as the foundation for community economic, health, and education activities.

Media Wahyudi Askar, Director of Fiscal Policy at the Center of Economic and Law Studies (Celios), even considers the 2026 TKD cut policy a setback that has the potential to violate the principles of fiscal decentralization and regional autonomy after 80 years of Indonesia's independence.

"In my opinion, constitutionally, this is clearly very contrary to the principle of decentralization in Article 18 of the 1945 Constitution," said Media to SUAR.

To overcome the short-term impact, Media suggested that regents and mayors urge the central government to re-discuss the 2026 State Revenue and Expenditure Budget (RAPBN).

He hopes that local governments can honestly convey the impact of this cut and urge for the TKD to be reconsidered.

Enhancing Fiscal Independence

However, Sarman Simanjorang advised regional heads to be more creative and work harder to explore new sources of regional revenue (PAD) to cover deficits caused by reduced transfers from the central government.

“Regents must be more proactive in attracting investors, mobilizing MSMEs, and leveraging regional flagship products,” he said.

In efforts to attract investors, Sarman emphasized that local governments cannot work alone. It is important to collaborate with various ministries, such as the Ministry of Investment and Downstreaming, the Ministry of Industry, and other relevant ministries, to direct investors according to the region’s resource potential.

He sees regions within special economic zones (KEK) as having great potential. Therefore, he encourages regional heads to actively establish new industrial zones and promote investment opportunities. “Regions within special economic zones (KEK) have significant potential to increase PAD through investor participation,” said Sarman.

“Regions within special economic zones (KEK) have significant potential to increase PAD through the entry of investors,” said Sarman.

He also encouraged regional heads to proactively establish new industrial zones that align with local potential and actively promote investment opportunities.

To increase regional revenue (PAD), Herman Suparman proposed several innovations. He advocated improving the tax collection system using digital platforms and streamlining the taxpayer database. “In our view, this is the only way to increase PAD more effectively than relying on regional levies,” he explained.

Furthermore, Herman added that local governments must provide ease and certainty for investment, especially in the service sector, through improvements in licensing.

According to him, encouraging investment in service sectors such as tourism can boost revenue from related industries, such as hotels, restaurants, and other entertainment, thereby optimizing regional tax income.

“In addition, if investment rises, it also affects the Land and Building Acquisition Duty (BPHTB). The buying and selling of land and buildings carries BPHTB potential,” explained Herman, who is also a researcher in regional economic governance.

He cited several regions that have successfully optimized their economic and tourism potential, such as Jakarta, Surabaya City, Tangerang City, and Bandung Regency. However, he emphasized that these cities cannot be directly compared to other regions because each area has different potential.

Herman also gave examples of fiscal incentive policies implemented by local governments, such as in Jakarta and West Java.

“Fiscal incentives for taxpayers related to Motor Vehicle Tax (PKB), for example, by eliminating late payment penalties, also encourage increased tax compliance,” he explained.

According to Herman, measures like these can serve as examples for other regions to boost PAD. Another alternative is to utilize non-APBD financing schemes, such as partnerships with the private sector (public–private partnership) or optimizing regional assets.