Examining the Role of Local Government’s Financial Performance and Capital Expenditure in Increasing Economic Growth in Banten Province, Indonesia (2018–2022)

Mohamad Harry Mulya Zein (), Muhtarom Muhtarom, Mulyadi Mulyadi and Sisca Septiani
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Mohamad Harry Mulya Zein: Government Management, Government Administration Study Program, Institut Pemerintahan Dalam Negeri (IPDN), Jakarta Selatan 12560, Indonesia
Muhtarom Muhtarom: Faculty of Law, Social and Political Sciences, Taxation, Universitas Terbuka (UT), Tangerang Selatan 15418, Indonesia
Mulyadi Mulyadi: Government Management, Government Administration Study Program, Institut Pemerintahan Dalam Negeri (IPDN), Jakarta Selatan 12560, Indonesia
Sisca Septiani: Graduate Faculty, Universitas Negeri Semarang, Kota Semarang 50233, Indonesia

JRFM, 2024, vol. 17, issue 10, 1-14

Abstract: This study aims to analyse how financial ratios such as the independence ratio, effectiveness ratio, efficiency ratio, fiscal decentralisation ratio, dependency ratio, and compatibility ratio affect economic growth, directly or indirectly, through capital expenditure as a mediating factor. This research used a quantitative approach; purposive sampling was conducted, and path analysis was applied to explore the relationships between variables. The results show that self-reliance, effectiveness, efficiency, fiscal decentralisation, dependency, and capital expenditure significantly affect economic growth. The independence and effectiveness ratios have a positive impact, indicating that improvements in these variables directly foster economic growth. However, the efficiency and fiscal decentralisation ratios have a negative effect, suggesting that increases in these variables may reduce economic growth. Indirectly, through capital expenditure, the independence, effectiveness, dependency, and compatibility ratios significantly affect economic growth, with the independence ratio being the most dominant. Conversely, the fiscal decentralisation and efficiency ratios did not show significant indirect effects, indicating that capital expenditure is not an effective mediator for these variables. These findings provide insights into how local financial management strategies can influence regional development, offering key policy recommendations for Banten’s local government.

Keywords: financial performance; capital expenditure; economic growth; local government; fiscal policy (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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