Satria Sambijantoro, Subang, West Java – Political decentralization since 1999, under which new provinces and regencies continue to be created, has generated inefficiencies that could threaten macroeconomic stability, an official says.

Deputy Finance Minister Bambang Brodjonegoro said the establishment of new regions was continuously creating fixed costs for the economy that weighed heavily on state spending.

"This makes our state budget unproductive because it has to keep paying for these fixed costs," Bambang said in Jakarta over the weekend. "Currently, this is the biggest threat to our macroeconomic stability as it creates unnecessary pressure [on the state budget]."

Bambang said the establishment of new regencies and provinces was driven mainly by local politicians for their own financial gain. "If their area becomes a new province, then [those politicians will become local leaders and] will have their own regional budget," he said.

After the fall of authoritarian leader Soeharto in 1998, democracy and a decentralized political and economic system took hold in Indonesia, with local leaders now having the authority to manage regional funds.

In the 2014 state budget, the government earmarked more than one-third of its spending, or Rp 592 trillion (US$50 billion), for "funds allocated to regions", which is to be channeled directly to local leaders. The 2014 allocation is Rp 63 trillion higher than this year's.

Large regional disbursements, however, have not translated into better welfare and infrastructure development, according to economists. According to a study by the Home Ministry, only 22 percent of regional governments are performing well. The remaining 78 percent are failing, it says.

This poor performance is mainly due to inadequate budget management capacity at the regional level, coupled with a lack of oversight that has spawned corruption.

As an example, Bambang said the underdeveloped province of Papua had been lavished with special autonomy funds, yet it still had a high poverty rate. "The funds there are being sucked up by the elites," said the deputy minister.

While some studies have exposed the failings of regional autonomy, lawmakers are spurring decentralization along. In an effort to further diffuse power, the House of Representatives is currently deliberating the villages bill, which if passed, would allow regional leaders as low as sub-district heads to manage their own regional budget.

"Who will supervise the funds' management?" Bambang said when asked about the villages bill. "Sub-districts are fundamentally too small to manage their own budget. It's dangerous."

Budiman Sudjatmiko, a lawmaker from House Commission II overseeing regional autonomy, offered an opposing view, saying "a radical change in the state budget's design" was due.

"If we allocate the biggest share of funds to villages [subdistricts], then it would cut bureaucratic red tape in budgeting and foster the development of the villages," he said on Sunday.

"The current budgeting system has been bulky at the top, and thin at the bottom. This is why regions want to be in charge of their own budget and bypass the central government."

There are currently at least 250 proposals for establishing new political units – provinces, regencies, or districts – under consideration by House Commission II, according to lawmaker Ignatius Mulyono. Latest data from Regional Autonomy Watch (KPPOD) showed that Indonesia currently had 34 provinces, 98 cities and 410 regencies.