The Impact of Public Spending and Investment Flows on Fiscal Capacity and Unemployment in Banten Province

Budi Prajogo; Christian Kuswibowo; Farhat  Abas; I Dewa Ketut Suharjana; Moh. Tahang

doi:10.70716/ecoma.v4i3.787

Authors

Budi Prajogo Departement of Accounting, Sekolah Tinggi Ilmu Ekonomi Ganesha, Indonesia
Christian Kuswibowo Marketing Management in the Electronics Industry, Politeknik APP Jakarta, Indonesia
Farhat Abas Departement of Management, Sekolah Tinggi Ilmu Ekonomi Ganesha, Indonesia
I Dewa Ketut Suharjana Departement of Management, Sekolah Tinggi Ilmu Ekonomi Ganesha, Indonesia
Moh. Tahang Departement of Accounting, Sekolah Tinggi Ilmu Ekonomi Ganesha, Indonesia

DOI:

https://doi.org/10.70716/ecoma.v4i3.787

Keywords:

Public Spending, Domestic Investment, Foreign Direct Investment, Fiscal Capacity, Unemployment

Abstract

The persistent challenges of regional fiscal sustainability and labor absorption in developing economies necessitate a deeper understanding of the drivers of local economic performance. This study addresses this critical issue by examining the impact of public spending and investment flows on regional fiscal capacity and unemployment in Banten Province, Indonesia, a rapidly industrializing region facing significant development pressures. Employing a quantitative explanatory approach, this study utilizes panel data from eight districts and cities over the period 2015–2023. A fixed-effect panel regression analysis with year fixed effects was applied to assess the effects of public spending, domestic investment (PMDN), and foreign direct investment (PMA) on fiscal capacity and the open unemployment rate. The analysis revealed that public spending and domestic investment have positive and significant effects on regional fiscal capacity, with coefficient estimates of 0.081 and 0.074 respectively, implying that a 1% increase in each variable is associated with an increase of approximately 0.00081 and 0.00074 points in the Fiscal Capacity Index. Concurrently, both variables contribute to unemployment reduction, with a 1% increase in public spending and domestic investment associated with decreases of 0.00214 and 0.00187 percentage points in the open unemployment rate. Conversely, foreign direct investment exhibits a positive but statistically insignificant effect on fiscal capacity and a negative but insignificant effect on unemployment, suggesting that PMA's contribution to both outcomes remains limited in the short to medium term. These findings underscore the paramount importance of optimizing productive public expenditure and strengthening domestic investment as pivotal strategies for enhancing fiscal sustainability and improving employment outcomes in Banten Province.

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