Do Fiscal Instruments Promote Regional Economic Growth? Evidence from Local Governments in Indonesia

Diana Diana; Mariana Mariana; Yeni Irawan; Zulkarnaini Zulkarnaini; Muhammad Arifai; Anggraeni Yunita

doi:10.32535/ijafap.v9i2.4808

Do Fiscal Instruments Promote Regional Economic Growth? Evidence from Local Governments in Indonesia

Diana Diana, Mariana Mariana, Yeni Irawan, Zulkarnaini Zulkarnaini, Muhammad Arifai, Anggraeni Yunita

Abstract

This study examines the effects of local government debt, regional investment, and local tax revenue on regional economic growth, with regional capital expenditure serving as a moderating variable. Drawing on Endogenous Growth Theory, the study posits that fiscal instruments contribute to economic growth when they are translated into productive public capital, infrastructure, and services that enhance regional productivity. Using a quantitative approach, the study analyzes secondary panel data from Indonesian local governments. The analysis covers 1,758 observations from 504 local governments over the 2019–2022 period. Model-selection tests support the use of the fixed-effects model, which is estimated with cluster-robust standard errors. The results show that local government debt has no significant effect on regional economic growth (? = -2.012102; p = 0.290106). Regional investment also has no significant effect (? = -0.256702; p = 0.417639). The coefficient on local tax revenue is negative and statistically significant (? = -1.539717; p = 0.043935), while the coefficient on capital expenditure is positive and statistically significant (? = 9.105280; p < 0.001). The interaction results show that capital expenditure does not significantly moderate the effects of local government debt or regional investment. However, it significantly moderates the relationship between local tax revenue and regional economic growth in a positive direction (? = 0.056629; p = 0.040994). These findings indicate that increasing fiscal resources alone is insufficient to promote regional economic growth. Productive allocation and effective utilization of capital expenditure are important for translating fiscal capacity into assets that support sustainable regional development.

Keywords

capital expenditure; local government debt; local tax revenue; regional economic growth; regional investment

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DOI: https://doi.org/10.32535/ijafap.v9i2.4808