Poverty Reduction, Economic Growth, and Local Government Fiscal Policy in Indonesia Yuniarto Hadiwibowo (a*), Tanda Setiya (a), Taufik Raharjo (a), Arif Purbantara (b)
a) Polytechnic of State Finance STAN
Bintaro Utama Sektor V, Tangerang Selatan 15222, Indonesia
yhadiwibowo[at]pknstan.ac.id
b) Ministry of of Village, Development of Disadvantaged Regions and Transmigration
Abstract
Poverty reduction and economic growth are two of the objectives of sustainable development. Poverty reduction is the goal number one of the Sustainable Development Goals (SDGs), while sustainable growth is the goal number eight. This study examines the role of local government on economic growth and poverty reduction in Indonesia. The analyses in this paper use panel data from Indonesia between 2016 and 2021. The data comprises 434 municipalities in Indonesia. This study includes three poverty measurements, i.e. poverty headcount index (P0), poverty gap index (P1), and poverty severity index (P2). Factors included are the characteristics of the municipalities and their fiscal policy. Local government expenditures are classified into capital, goods and services, and other expenditures. Revenue comprises local own-source revenue, transfer from the central government, and other revenue. The empirical evidence suggests that regional economic growth serves as a partial mediator of the characteristics and fiscal policy of the municipalities on poverty. Local government fiscal policy affects poverty differently according to their classification. Local own-source and other revenues decrease poverty while transfer from the central government does not affect poverty. The impacts of expenditures also differ among classifications. Moreover, the results are different among measurements of poverty. The characteristics and fiscal policy of the municipalities have both direct and indirect effects on the poverty headcount index (P0), but only have indirect effects on the poverty gap index (P1) and poverty severity index (P2) through regional economic growth. The implication of the study is the local government should improve policies on poverty reduction, especially to reduce the poverty gap index (P1) and poverty severity index (P2).
