The Fiscal Independence Paradox: Why Does Decentralization Decrease Capital Expenditure Allocation?
DOI:
https://doi.org/10.31941/jebi.v29i1.7498Abstract
This research examines the disconnect between fiscal decentralization mandates and the suboptimal realization of capital expenditure within local governments. The objective of this study is to analyze the impact of regional financial performance—comprising Local Own-Source Revenue (PAD) Growth, Degree of Decentralization, PAD Effectiveness, and Regional Financial Efficiency—on Capital Expenditure. Adopting a quantitative approach, the study analyzes panel data from seven regencies and cities in the former Pekalongan Residency over the 2020-2024 period (35 observations). Utilizing panel data regression with the Random Effect Model (REM), the study reveals paradoxical empirical findings: the Degree of Decentralization has a significant negative impact on Capital Expenditure, suggesting that increased financial independence paradoxically crowds out capital investment allocations. In contrast, PAD Effectiveness and Regional Financial Efficiency were found to exert a significant positive influence, serving as drivers for capital expenditure capacity. Meanwhile, PAD Growth showed no significant effect, potentially due to budget refocusing policies during the COVID-19 pandemic. These findings imply the presence of agency problems in budgetary prioritization and underscore the necessity of controlling operational expenditures to ensure that regional fiscal independence translates into tangible public development.
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