Who Absorbs Fiscal Adjustment? Transfer Composition and Local Budget Adaptation in Indonesia

Abstract

This study examines how changes in the composition of intergovernmental transfers are associated with the distribution of fiscal adjustment across local government expenditure in Indonesia. It compares three contrasting fiscal episodes is the 2020 emergency adjustment, the 2025 policy induced transfer recomposition, and the 2026 budget year adjustment. The analysis combines harmonized aggregate regional budget and intergovernmental transfer data for 2019–2026 with accounting decomposition, structured pattern comparison, and policy document triangulation. The findings show that fiscal adjustment is distributed unevenly across expenditure categories. In 2020, capital expenditure declined by 28.02%, compared with 3.03% for personnel expenditure. In 2025, a 0.91% increase in the aggregate central transfer allocation concealed substantial compositional changes, including a 65.35% reduction in physical special allocation funds, while realized capital expenditure declined by 20.80% and personnel expenditure increased by 3.83%. The 2026 budget shows a similar planned pattern, with capital expenditure declining by 29.55% compared with 1.18% for personnel expenditure. The study develops the concept of composition-sensitive fiscal transmission, emphasizing that fiscal adjustment should be assessed through the scale of transfer change, the composition of affected transfer instruments, and the expenditure incidence of adjustment.