The Influence of Regional Original Income and General Allocation Funds on Economic Growth with Capital Expenditures as an Intervening Variable

Abstract

Purpose: The purpose of this research is to explore the relationship between financial sources, public services, and economic growth at the local government level. Specifically, the study aims to investigate how Regional Original Income and General Allocation Fund allocations impact capital expenditure and subsequently influence economic growth. By examining these relationships, the research seeks to provide insights into the effectiveness of financial management strategies employed by local governments in promoting economic development and improving public services.   Methods: This study utilizes data from all districts/cities of Bali Province for the period 2015-2020, comprising Regional Original Income, General Allocation Fund, Capital Expenditure, and Economic Growth indicators, totaling 54 data points. A saturated sampling approach, also known as total sampling, is employed to ensure comprehensive coverage of the dataset. The analysis technique involves Structural Equation Modeling (SEM) using the SmartPls 3.2.8 program, allowing for the examination of complex relationships between variables and the assessment of their direct and indirect effects.   Results and discussion: The findings of this study reveal several key insights: 1) Regional Original Income positively and significantly influences capital expenditure, indicating that higher revenue generated within regions contributes to increased investment in infrastructure and development projects; 2) General Allocation Fund demonstrates a positive but insignificant effect on capital expenditure, suggesting that while these funds are allocated for public services, they may not directly translate into capital investments; 3) Regional Original Income and General Allocation Fund show negative and insignificant effects on economic growth, implying that other factors may have a stronger influence on overall economic performance; and 4) Capital expenditure exhibits a positive but insignificant effect on economic growth, suggesting that while investment in infrastructure may contribute to economic development, other factors play a more significant role.   Implications of the research: The findings of this research have implications for local government policymakers and stakeholders involved in financial management and economic development planning. By understanding the relationships between financial sources, capital expenditure, and economic growth, policymakers can devise more effective strategies for resource allocation and investment prioritization. Additionally, the study highlights the need for comprehensive approaches that consider various factors influencing economic growth beyond financial inputs alone, such as regulatory environments, market conditions, and governance structures. Originality/value: This research contributes to the literature by providing empirical evidence on the relationship between financial sources, public services, and economic growth at the local government level, particularly within the context of Bali Province. By employing Structural Equation Modeling and analyzing a comprehensive dataset, the study offers insights into the nuanced dynamics of financial management and its implications for economic development. Furthermore, the findings underscore the importance of considering multiple factors in the formulation of local government policies aimed at fostering sustainable economic growth and improving public services. Overall, this research adds value to the understanding of local government finance and its role in driving regional development agendas.