Surabaya — A new study published in 2026 has found that the quality of regional government spending plays a more decisive role in economic growth than revenue performance alone in East Java’s Bakorwil II region. The research, conducted by Lidya Teresya and Syamsul Huda from the Department of Development Economics, UPN “Veteran” Jawa Timur, examines how regional financial performance ratios influenced economic growth from 2015 to 2024 during Indonesia’s fiscal decentralization era. The findings matter because they provide fresh evidence on how local budget management can directly shape long-term regional development.
The study comes at a time when fiscal decentralization remains central to Indonesia’s regional development strategy. Since local governments were granted greater autonomy over public finance, questions have persisted over whether larger budgets and stronger local revenue systems actually translate into stronger economic performance. This research offers an important answer: growth is more closely linked to productive development spending than to revenue achievement alone.
Bakorwil II, one of East Java’s key administrative and economic zones, includes Bojonegoro, Lamongan, Tuban, Jombang, Mojokerto Regency, Gresik, Nganjuk, and Mojokerto City. These districts and municipalities represent diverse economic structures, ranging from agriculture and fisheries to manufacturing, trade, and energy-based industries. That diversity makes the region a strong case study for understanding how fiscal policy affects local economies.
Using a quantitative panel-data approach, the researchers analyzed ten years of secondary data from regional government financial reports and official statistics from Indonesia’s Central Bureau of Statistics (BPS). Rather than relying on a single-year snapshot, the study tracks changes across time and across eight local governments. The analysis focuses on three core financial indicators: the financial independence ratio, the effectiveness ratio, and the activity ratio, and compares them with regional economic growth measured through Gross Regional Domestic Product (GRDP) growth rates.
The results reveal a clear pattern.
The activity ratio, which reflects how much of a regional budget is allocated to capital expenditure and development spending, showed a positive and statistically significant relationship with economic growth. In practical terms, this means that regions directing more resources into infrastructure, public investment, and productive development projects tend to experience stronger economic expansion.
By contrast, the effectiveness ratio, which measures how successfully local governments meet revenue targets, showed a negative and significant relationship with economic growth. This suggests that stronger revenue realization does not automatically support growth. In some cases, higher local tax collection or aggressive revenue measures may place additional pressure on businesses and consumers, potentially slowing economic activity.
Meanwhile, the financial independence ratio, which reflects the share of locally generated revenue in total regional income, showed a positive but statistically insignificant effect. This indicates that while stronger local revenue capacity may support development, it does not by itself guarantee measurable economic growth unless the funds are allocated effectively.
According to the statistical model, the three variables together significantly influence economic growth, with the F-test probability value recorded at 0.02738, below the 0.05 significance threshold. However, the model explains around 12.85 percent of the variation in economic growth, meaning that other factors such as private investment, labor productivity, industrial performance, and macroeconomic conditions continue to play a larger role.
The findings are especially relevant in the context of East Java’s uneven regional economy. Industrial hubs such as Gresik and Tuban benefit from manufacturing and trade, while areas like Bojonegoro are strongly influenced by oil and gas extraction. Because these sectors respond differently to fiscal decisions, the study highlights the need for region-specific policy strategies rather than a one-size-fits-all budgeting model.
As Lidya Teresya and Syamsul Huda of UPN “Veteran” Jawa Timur effectively show through their analysis, productive public expenditure has a stronger economic impact than revenue performance alone, particularly when spending is directed toward infrastructure and development-oriented sectors.
This insight carries significant policy implications.
For local governments, the study suggests that success should not be measured solely by how much revenue is collected or how large the local budget becomes. Instead, emphasis should be placed on how funds are spent, especially whether the budget supports roads, logistics networks, education, healthcare services, and small business development.
For policymakers at the national level, the research reinforces the importance of strengthening oversight mechanisms in fiscal decentralization. Budget transfers from the central government may be more effective when paired with performance-based monitoring that prioritizes development outcomes rather than administrative compliance alone.
The business sector may also benefit from these findings. Regions with higher development spending often create stronger infrastructure ecosystems, reduce operational costs, and improve market accessibility, making them more attractive for investment and expansion.
From a broader societal perspective, the study supports the argument that public spending quality remains one of the most critical drivers of inclusive regional growth in Indonesia.
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