Local Government Capital Spending in Indonesia: Impact of Intergovernmental Fiscal Transfers

Abstract

Indonesian policymakers intend to increase capital spending, especially on traditional infrastructure, at all levels of government in order to stimulate economic growth. Intergovernmental capital grants can have very significant impact on encouraging such spending at the subnational level. The main problems with capital transfers in the Indonesian context are that grant funding has stagnated at low levels and the proportion of funding allocated to infrastructure has declined considerably. Given current institutional constraints, the likelihood of increasing grant funding for subnational infrastructure is dubious, which suggests that economic growth in Indonesia may remain suboptimal for the near future.

How Significant is the Difference of Own Source Revenue and Intergovernmental Transfer Impact on Local Education Spending in Java and Papua Island?

“…The variables used are various local government revenues and other social-economic variables as control variables. This paper is mainly following Lewis [1] and Levaggi and Zanola [3] where they try to figure out the impact of intergovernmental fiscal transfer towards the regional government spending for capital spending in Indonesia and health in Italy respectively. This paper uses two models.…”

“…Lewis [1] found that the largest marginal effect towards local expenditure spending in infrastructure was for a specific allocation fund. This is due to specific allocation fund which has more both income and the substitution effect whereas other type of grants only only income effects [1].…”

“…Lewis [1] has conducted study in Indonesia and shows that all intergovernmental fiscal transfer categories have a significant marginal effect to the local capital spending by dynamic panel data (DPD) and system Generalized Method of Moment (GMM). Lewis [1] found that the largest marginal effect towards local expenditure spending in infrastructure was for a specific allocation fund.…”

“…On the other hand, own source revenue (PAD) has a smallest share in generating the local government revenue. Lewis [1] also finds that intergovernmental transfer in Indonesia can give impact on local government capital spending for infrastructure as well as health and education. His finding shows that there is a statistically significant impact of intergovernmental fiscal transfer towards local government capital spending.…”

“…The endogeneity problem found in the most fiscal variables should be overcome. Hence, the GMM system is the best approach to overcome such problem in this context [1]. Moreover, the data used in this paper are for 138 cities/districts in Papua Island and Java Island with a series of year 2007-2012.…”