The Role Of Economic Growth Moderation In The Relationship Of Regional Original Revenue, General Allocation Funds, And Special Allocation Funds With Capital Expenditure (Study On Local Governments In Central Java Province In 2011–2024)

Abstract

How much of a region's revenue actually turns into public assets is a question that Indonesian local governments answer very differently. This study asks whether the pace of the regional economy conditions that conversion, by testing economic growth as a moderator of the links between three revenue sources, locally generated revenue (PAD), the general allocation fund (DAU), and the special allocation fund (DAK), and capital expenditure. A balanced panel was assembled for all 36 government entities in Central Java (35 regencies/municipalities plus the provincial government) across fourteen years, 2011–2024, producing 504 observations sourced from budget realization reports of the Ministry of Finance and growth figures from Statistics Indonesia. After the Chow and Lagrange Multiplier procedures pointed to the Random Effect specification, the model was extended with interaction terms and estimated in EViews. Two revenue sources, PAD and DAU, are found to raise capital spending, DAU being roughly three times as influential, while DAK is associated with lower capital spending. All three interaction terms are significant and positive: growth widens the pass- through of PAD and DAU into capital budgets and softens the drag exerted by DAK. Fiscal capacity alone, in other words, does not guarantee productive spending, it needs a growing economy to work through.