The Impact of Local Revenue and Capital Expenditure on Economic Growth of Indonesia: Spatial Econometric Analysis

Abstract

This statistical model investigates the influence of two distinct types of physical capital, local revenue and capital expenditure, as independent factors that impact Indonesia’s economic growth with the aid of spatial econometric models and panel data analysis. The study particularly focuses on analysing the dynamics of fiscal policy and its implications for regional economic growth, which is a critical aspect for developing economies like Indonesia. The applied spatial econometric methods allow the nuanced exploration of spatial patterns and their implication on economic growth. Utilizing secondary financial data sourced from the Central Bureau Statistics of Indonesia, spanning from 2012 to 2021, encompasses all provinces in Indonesia. Using growth rate data, this research utilizes a spatial econometric panel data model employing the Ordinary Least Squares (OLS) regression method. It is found that for every 1% increase in the ratio of local revenue and capital expenditure, Indonesia’s GDP will grow by 0.0147% and 0.0123%, respectively. All variables considered are identified to be stationary and they enhance the robustness and credibility of the findings. The statistical significance of local revenue and capital expenditures on economic growth has been established.