ANALYSIS-Indonesia's regional budget cuts set to spur more local tax hikes and public outrage

Prabowo last week proposed to parliament that regional funding be cut by a quarter to 650 trillion rupiah ($40 billion) in 2026 - part of his efforts to re-centralise government finances and fund signature ambitious policy programmes like his promise of free school lunches nationwide.

The planned cuts are sure to inflame the debate over Prabowo's spending priorities. The government argues the programmes will bring economic growth and prosperity over the long term, but critics counter his priorities are too costly and endanger democracy by taking away autonomy from regional areas.

Local leaders say the proposed cuts, which would result in the smallest regional budget in a decade, will just lead to more jumps in local taxes.

They add that they have had no choice but to hike taxes due to the previous administration's efforts to rein in local control over natural resources, and a 6% cut to 2025 regional funding compared to initial budget plans.

Already in some towns, anger has hit a boiling point.

In Pati in Central Java last week, police fired tear gas and used water cannon to disperse thousands of protesters who hurled rocks into a government office and set ablaze a police car amid an outcry over a 250% land tax hike.

Another town in the Sulawesi islands, Bone, also saw hundreds demonstrate against a planned 65% increase in local land and property taxes.

"This is a matter of fairness. The source of people's unrest is economic issues, when distribution is unfair and economic development is not inclusive, is uneven and does not trickle down," said Bursah Zarnubi, chairman of Indonesia's association of district leaders.

Local leaders are seeking to meet with Prabowo by the end of the month, he said.

Masinton Pasaribu, head of Sumatra island's Central Tapanuli district, said that the cuts threatened many planned projects and "the people will certainly be angry."

Bursah also noted his district of Lahat in South Sumatra province is dependent upon the central government for 90% of its budget. The proposed cuts could put a water irrigation project worth trillions of rupiah, as well as services such as healthcare and education, at risk, he said.

Representatives for the Ministry of Home Affairs, the finance ministry and the president did not immediately respond to Reuters requests for comment about local leaders' concerns.

Asked about planned cuts last week, Finance Minister Sri Mulyani Indrawati said the public would benefit at the regional level from central government initiatives, including the free meals and infrastructure projects.

DECENTRALISATION IN DANGER

Prabowo is seeking to spur economic growth of 8% during his term and recent economic data has been solid, with Southeast Asia's biggest economy expanding at a better-than-expected 5.1% in the second quarter, the fastest pace in two years.

The rupiah IDR= has stabilised after hitting a nearly three-decade low in March, and foreign investment is also rising, with total investments growing 2.6% year-on-year in the first six months of 2025.

That said, analysts worry that Prabowo is robbing Peter to pay Paul with the regional funding cuts.

The budget for the programme to give free meals to 83 million school children and pregnant women - or a quarter of the population - is set to nearly double to 335 trillion rupiah ($20.5 billion). Cases of food poisoning and kitchens not being paid have also resulted in much public ire.

Some critics are also worried about the implications of the regional funding cuts for democracy in Indonesia.

Decentralisation and regional autonomy were two key pillars of reforms in the wake of the 1966-1998 New Order era of the late autocrat Suharto, whom Prabowo served under as a top military commander.

Though local leaders have often been criticised for failing to use funds promptly for development projects, decentralisation was lauded as a crucial way to ensure equitable development across a vast, resource-rich archipelago.

That is now in danger, said Regional Autonomy Watch executive director Armand Suparman.