Government Revenue and Spending Nexus in Regional Indonesia: Causality approach

Abstract

This study aims to test the hypothesis that explains the relationship between tax revenue and government spending in six Indonesia regions. Furthermore, the units of analysis were districts and cities in each region from 2006 to 2017, and a Granger panel causality approach was used. The results showed that out of the six regions, five experienced bidirectional causality between tax revenues and local government spending, namely Java, Sumatra, Kalimantan, Sulawesi, and the Bali & Nusa Tenggara. Also, there was fiscal synchronization in five regions, while the tax-spend hypothesis applies in the Papua & Maluku regions. Therefore, the local governments in these regions need to be careful in deciding actions related to increasing revenue. This can be achieved through optimization from the tax sector, as well as increment in expenditure by encouraging public spending from the administration .