The Impact of Productive Composition of Government Spending and Economic Growth: An Empirical Analysis in Decentralization District Government

Abstract

The study investigates the spending and economic growth of district governments that implement fiscal decentralization. The main objective is to analyze the effects of productive and non-productive according to the function of government spending on economic growth. The objective is then extended to examine the composition of spending based on the function of spending. More broadly, the objective examines the comparison of district fiscal independence in terms of the growth effects of government spending composition. The study develops an endogenous growth framework and identifies government spending as productive and non-productive covering both spending functions. The study also wants to address vertical fiscal inequality, the government budget constraint (GBC) from the revenue side which comprises of original local revenues of tax and non-tax, other legal revenue and transfer funds from the central government as a balanced fund. Using panel data from 514 districts in Indonesia covering 2010 to 2020, the study used Generalised Method of Moments (GMM) techniques. By adopting the public policy endogenous growth model, the study empirically wants to test the shift in government spending from non-productive to productive forms of spending, but this study identifies long-term output increases at the district government level.