THE ASSOCIATION OF LOCAL OWN-SOURCE REVENUE GROWTH AND CAPITAL EXPENDITURE GROWTH ON FISCAL STRESS

Abstract

Fiscal stress arises when a region's revenue is insufficient to cover its spending or to keep up public services. This study looks at the relationship between growth in local own-source revenue and growth in capital expenditure and fiscal stress in the provincial governments of Indonesia from 2021 to 2025. For the analysis, actual budget data from the Regional Financial Information System is used together with a fixed-effects panel model that includes both province and year effects, and robust standard errors are applied to the 178 observations. The results indicate that growth in local own-source revenue is linked to reduced fiscal stress, although this association is not statistically significant in the main model. In contrast, growth in capital expenditure is associated with higher fiscal stress and this connection is statistically significant. When both variables are considered together, however, their relationship is statistically significant. The sensitivity analysis reveals that when the regions related to Papua are excluded, growth in revenue becomes significantly linked to lower fiscal stress. The steady relationship between growth in capital expenditure and fiscal stress stays the same. These findings indicate that fiscal stress is determined by the extent to which revenue meets spending requirements. Furthermore, they lend support to the idea of combining efforts to improve revenue with medium-term planning of capital investments. The present study makes a contribution by employing a normalized measure of the gap between spending and revenue and by examining the robustness of the results with respect to changes in regional boundaries and different years.