How Government Spending on Public Sector Affect The Economic Growth?

Abstract

Fiscal decentralization is an effort to reform governance so that it has a more effective and efficient structure so that it can improve services to the community. Efforts to achieve these goals are largely determined by the availability of human resources, natural resources, and other economic potential. The formation of New Autonomous Regions (NAR) grew rapidly, but on the other hand local governments were unable to fund development activities independently but were dependent on balance funds. The objective to be achieved is to analyze the effect of regional government spending on education, health, and infrastructure, as well as other variables namely labor on the economic growth of new autonomous regions in Indonesia. The analysis model used is panel data regression. The results of the study prove that local government spending in real per capita education, real health (lag-1) per capita, and real per capita infrastructure, and the number of workers have a positive and significant effect on economic growth. Economic growth that occurs in the district is not different from the city, so also in the base sector is mostly no different except the mining and quarrying sector.

How important are health and education in boosting sub-national economic growth?

“…As shown in Table 5 (GMM1), government expenditures (gGE) have positive and statistically significant impact on sub-national growth. The finding is in line with the results found in OECD countries (Connolly & Li, 2016), in European Union countries (Sáez et al, 2017), in high-income and low-income countries (Chu et al, 2020) and in Indonesian provinces (Ambya, 2020).…”

“…The choice of variables was adapted from the previous work (Ambya, 2020) by adding health and education outcomes, bank credit, and investment. The data used were annual data from 33 provinces in Indonesia.…”

“…Chu, Hölscher, & McCarthy, 2020;Musa & Jelilov (2016) found a positive relationship between government spending and economic growth. Whereas, Ambya (2020) found that local government spending had a positive effect on the economic growth in these areas. However, Sáez, Álvarez-García, & Rodríguez (2017) found that government expenditures had no significant impact on growth in European Union countries.…”

“…The social sector includes the health sector (Umar, 2017) and the education sector (Ogundari & Awokuse, 2018). In addition, development is also influenced by the availability of financing (Dawood, Pratama, Masbar, & Effendi, 2019) and public spending (Ambya, 2020;Elia, Yulianto, Tiawon, Sustiyah, & Indrajaya, 2020).…”

“…Government spending tends to be followed by growth, while sub-national level governments' spending makes up half of total public spending. Public spending has an important impact on national economic growth (Chu et al, 2020) and also toward sub-national economies (Ambya, 2020). As a note, public spending by sub-national governments is a significant portion of total government spending and accounts for half of nation-wide public spending in Indonesia (Table 1).…”