The Effect of Government Capital Expenditure on Economic Growth

and Its Impact on Community Welfare

Nelly Masnila

, Lisnini

, Silvana Oktanisa

Department of Accounting, State Polytechnic of Sriwijaya, Palembang, Indonesia

Department of Business Administration, State Polytechnic of Sriwijaya, Palembang, Indonesia

Keywords: Capital expenditure, economic growth, human development index

Abstract: Capital expenditure is government expenditure for development activities such as infrastructure

development, basic facilities, and other infrastructure. In economic theories, it is stated that government

spending is one of keys to economic growth. Economic growth is an indicator that a country/region

experiences a development. In turn, continuous and sustainable economic growth will improve the welfare

of the community. This study used panel data related to the variables studied from 34 provinces in the 2012-

2016 periods. Multiple regression analysis is used to test and analyse the effect of growth and capital

expenditure on the human development index. From the results of this study it can be concluded that

government capital expenditure and economic growth together influence the welfare of the community. But

partially, only capital expenditure has a significant positive effect on people's welfare, while economic

growth shows no influence.

1 INTRODUCTION

Because of limited resources, regional government

must be able to allocate revenue obtained for

productive expenditures. Capital expenditures and

goods/services expenditures are government

expenditures which are expected to have an

influence on the economic growth of a region,

beside private, household and foreign sectors (Arsa

& Setiawina, 2015).

Economic growth is a change in economic

conditions of a country/region which is getting

higher/better than the previous period. Economic

growth is one indicator that a country/region

experiences development success. Economic growth

is closely related to the increasing availability of

goods and services in community. Productivity of

goods and services reduce unemployment. In turn,

continuous and sustainable economic growth will

improve the welfare of the community.

Community welfare occurs due to economic

growth, among others, through the decline in

poverty. In the implementation of development, high

economic growth is the main target for developing

countries because economic growth has a close

relationship with the increase in goods and services

produced in the community, so that the more goods

and services produced, the more welfare of society

will increase (Arini, 2016 ).

The success of economic development is shown

by many indicators; they are economic growth,

increased employment, increased purchasing ability,

health care quality improvement, and many other

indicators. From the various indicators of the

economic development progress, one of which is a

success in improving the quality of human

development (Maqin & Abdullah, 2017).

Increasing of allocation of capital expenditure

should also improve the quality of human

development as measured through the HDI. If it can

be known the effect of government capital

expenditure on economic growth and employment,

as well as the influence of private investment on

economic growth and employment, then the

improvement of welfare level will be accelerated

Human Development Index is very close with

policies carried out by the government to improve

the quality of human resources. It is based on the

idea that education is not just preparing students to

be able to enter the job market, but more than that.

Education is one of the nation's character

development efforts (national character building)

such as honesty, fairness, sincerity, simplicity and

Masnila, N., Lisnini, . and Oktanisa, S.

The Effect of Government Capital Expenditure on Economic Growth and Its Impact on Community Welfare.

DOI: 10.5220/0009153400002500

In Proceedings of the 2nd Forum in Research, Science, and Technology (FIRST 2018), pages 113-117

ISBN: 978-989-758-574-6; ISSN: 2461-0739

113

exemplary. This research was conducted with a view

to seeing the effect of capital expenditure on

economic growth and human development index in

all provinces in Indonesia for the 2013-2016 periods.

2 LITERATURE REVIEW AND

HYPOTHESIS DEVELOPMENT

2.1 Capital Expenditures

According to Indonesia Government Regulation

number 71 year 2010 concerning Government

Accounting Standards (SAP), the definition of

capital expenditure is expenditure made in the

framework of capital formation which is to add fixed

assets/inventories that provide benefits for more than

one accounting period, including expenses for

expenses maintenance that is to maintain or add to

the useful life, as well as increase the capacity and

quality of assets

2.2 Economic Growth

Economic growth is the process of improving the

economic conditions of a country or region

continuously towards a better state during a certain

period. Besides that economic growth is also a

process of increasing the production capacity of

goods and services in an economy, so that economic

growth is considered as an indication of the success

of economic development of a country or nation. As

an indicator of a success of economic development,

economic growth is often used to measure the level

of prosperity of the population. Economic growth

leads to human development and that macro

economic policies aimed at achieving sustainable

economic growth should be maintained (Abraham &

Ahmed, 2011). Increasing productivity of goods/

services in a country/government means that the

country's economy is getting better. This has an

impact on the decline of unemployment rate, and on

the other hand an increase in the level of community

income means an increase in the welfare of society.

2.3 Community Welfare

Economic development is one of some ways to

improve community welfare, which is a series of

activities carried out by the government together

with all levels of society to achieve a better life. The

poverty level and human development index (HDI)

are two indicators to determine the level of

community welfare. HDI measures the level of

physical and non-physical quality of the population,

namely health, education level and other economic

indicators. To measure poverty level, the concept of

the ability to fulfill basic needs is used. In this

approach, poverty is seen as an economic inability to

meet basic food and non-food needs. So the poor

people are people who have an average per capital

expenditure below the poverty line.

Based on the description above, the research

hypothesis is formulated as follows:

: Capital expenditure affect to economic growth in

Indonesia in the 2012-2016 periods

: Capital expenditure affect to community welfare

in Indonesia in the 2012-2016 periods

: Economic growth affect to community welfare

in Indonesia in the 2012-2016 periods

: Capital expenditure and economic growth affect

to community welfare Indonesia in the 2012-

2016 periods

3 RESEARCH METHODOLOGY

This study used the entire population of 34

provinces in Indonesia with the 5 years of research

data (2012-2016). Variables of this research are

government capital expenditure, economic growth,

and human development index (HDI). Multiple

regression analysis is used to test and analyze the

effect of growth and capital expenditure on HDI by

using Eviews 9 program. The equation of regression

is as follow:

(1) EG = α + β

LNGE + ε

(2) HDI = α + β

LNGE + β

EG + ε

Notes: ED = economic growth proxy by Gross

Domestic Product; LNGE = logarithm natural of

capital (local government) expenditure; HDI =

community welfare, proxy by human development

index)

4 RESULT AND DISCUSSION

4.1 Result

From the results of the study it can be seen that for

periods of 2011-2017 the province with the highest

economic growth is Central Sulawesi with an

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average index of 9.55, followed by Southeast

Sulawesi with an index of 8.03, and then by West

Sulawesi with an index of 7.96. The province with

the lowest index was East Kalimantan with an index

of 2.44, followed by Aceh with a 2.58 of index, and

then Riau 2.81.

HDI is a comparison of life expectancy, literacy,

education, and living standards for all countries

throughout the world. The HDI is used to classify

whether a country is a developed country, a

developing country, or a backward country and also

to measure the influence of economic policies on

quality of life of people in a country. From the data,

it can be seen that the highest human development

index is owned by DKI Jakarta province, followed

by DI Yogyakarta, and the province of Riau Islands.

The lowest of human development index occurs in

the provinces of North Kalimantan, Papua, and West

Papua.

From the data (Table 3), it can be seen that the

greatest local government capital expenditures

(average) is held by DKI Jakarta province, followed

by East Kalimantan, and Papua. While the lowest

local government capital expenditures (average) is

held by Bangka Belitung province, and then

followed by Gorontalo, and Bengkulu.

The statistical analysis obtained the results for

the three panel data models, namely: Common

Effect Model (CEM), Fixed Effect Model (FEM),

and Random Effect Model (REM). The three panel

data models are then tested to get the best model

through these 3 following tests: 1) Chow Test , 2)

Hausman Test, and 3) Lagrange Multiplier Test (LM

Test)

Chow test is a test to determine whether the

Common Effect or FEM is the most appropriate to

be used in estimating the research panel data. Model

selection is done by comparing the value of F-

statistics (F

stat

) with F-table. If the F-statistics result

is greater (>) than F-table, the selected model is

FEM. If F-statistics is smaller (<) than F-table, the

selected model is CEM. The Cross-section F-value

of the Chow test above obtained a value of

437.5378. F-table values from numerator (dF-1) and

denumenator (dF-2) at ⍺: 5%, is 1.5464. From the

results of the Chow Test above it can be concluded

that F-stat is greater than F-table (437.5378 >

1.5464), so the model chosen from this Chow test is

FEM.

The Hausman test was conducted to test whether

the selected model for analyse research data using

the FEM or REM. If value of Chi Square statistics >

Chi Square table then the model used is FEM.

Whereas if Chi Square statistic < Chi Square table

then the chosen model is REM. In this study the

value of Chi Square calculated/statistic was obtained

at 5.5711. While the Chi Square table (df = 2, α =

0.05) is 5.9915. Based on the Hausman test, the Chi

Square statistics (5.5711) shows that the value is

smaller than the Chi Square table (5.9915), then the

best model for Hausman test is REM.

Lagrange Multiplier (LM) is a test to find out

whether the REM or the Common Effect (OLS)

model is the most appropriate to use. The basis of

the selection is to use a calculated Chi

Square/statistical value compared to the calculated

LM value. If LM counts > the critical value of chi-

squares statistics, the model used is the Random

Effect, and vice versa if LM counts < critical value

of chi-squares statistics, then the right model for

panel data regression is the CEM.

Based on LM statistics obtained that is 282.8001,

greater than Chi Square statistic of 5.5711 then the

selected model of the LM test is REM.

From the results of the 3 above tests, it can be

conclude that the best model is REM.

Estimation Equation from REM:

HDI = α + β

LNGE + β

EG + ε

HDI = 27.8466288389 + 1.47011327607 * LN_GE

- 0.0104448476419 * ED + e

From the above equation can be stated as

follows. In general, government capital expenditure

variables (X1) have a significant positive effect

(coefficient = 1.4701) on public welfare which is

represented by human development index (Y) with

p-value of 0.0000. This means that every increase of

1 unit (one hundred billion IDR) in government

capital expenditure will increase 1.4701 points of the

human development index. For other variables,

economic growth (X2) does not affect the human

development index. However, together all variables,

namely government capital expenditure and

economic growth affect the human development

index. This can be seen from the p-value of F-

statistic of 0.0000, which is smaller than α (5%).

In this study, the result of the coefficient of

determination (R2) is 0.2976 or 29.76%. The

coefficient of determination (R2) reflects 0.2976 or

29.76% of the human development index can be

explained by the variable government capital

expenditure, while the remaining 70.24% is

explained by other variables outside this study.

From the results of the selected output model can

be calculated and interpreted the individual effect

value (Ci) of the selected model (Random Effect

Model). This individual effect value shows the

sensitivity of each regional (provincial) government.

The Effect of Government Capital Expenditure on Economic Growth and Its Impact on Community Welfare

115

The sensitivity of each province can be calculated by

adding the individual effect value to the value of the

intercept. The greater the results of the calculations

obtained, the more sensitive the local (provincial)

government, on the contrary the smaller the results

of the calculations obtained the more insensitive the

local (provincial) government. From Individual

Value Effect Model Random Effect, it can be seen

Bangka Belitung Province has the highest intercept

value, namely 11.8761 while West Papua Province

has the lowest intercept value of -7.2965. This

means that, if it is assumed that all independent

variables have no influence (ceteris paribus), Bangka

Belitung Province has the highest human

development index, while West Papua Province has

the lowest human development index

4.2 Discussion

The results of this study indicate that government

capital expenditure has a significant positive effect

on the human development index. Capital

expenditure is used to finance expenditures made by

the government in order to provide services to the

community. This government expenditure is a

purchase/ procurement or construction of a fixed

asset that has a value of more than one year, such as

land, equipment and machinery, buildings and

buildings, roads, irrigation and networks, and other

fixed assets.

Each province has different types, amounts and

values of fixed assets. This is related to the policies

and work plans (short and long term) established by

the regional government. The capital expenditure

structure needs attention, because not all capital

expenditures have an impact on public services.

Some types of capital expenditure which generally

have an impact on public services are capital

expenditures for infrastructure development,

education and health buildings.

The Human Development Index (HDI) measures

the level of physical and non-physical quality of the

population, namely health, education level and

economic indicators. Therefore, the capital structure

is considered as government capital expenditure

which influences human development. The results of

this study support the study conducted by Mirza

(2011) and Arini (2016) before.

Economic growth is a picture of the total output

of goods and services from the input function of

production units used in an area within a certain

period. In practice, the value of GRDP is often used

as a macroeconomic indicator in measuring the level

of economic growth by comparing the

increase/decrease in the value of a particular year's

GRDP with the previous year. Economic growth

shows the development of a region's financial

condition. The human development index is the

level of the physical and non-physical quality of the

community which is not only seen from the

economic side but also from the issues of education

and health, therefore in this study it can be seen that

the results of the study indicate that economic

growth has no effect on the human development

index.

As mentioned earlier, capital expenditure shows

expenditure allocations set by the government for

the provision/development of regional government

assets. The capital expenditure structure shows the

amount of expenditure allocated to each fixed asset.

For this as a managerial implication, the government

needs to establish policies not only to achieve the

target of increasing economic growth but also the

target of increasing human development because

economic growth itself is not sufficient to improve

the quality of human resources, especially in the

aspects of education, health and community income

5 CONCLUSIONS

From the results of this study it can be concluded

that government capital expenditure and economic

growth together influence the welfare of the

community. But partially, only capital expenditure

has a significant positive effect on people's welfare,

while economic growth shows no influence

ACKNOWLEDGEMENTS

This research is supported by State Polytechnic of

Sriwijaya, Indonesia. The author thankfully

acknowledges for scientific discussion with our

colleagues and anonymous reviewers at the IC

FIRST 2018 for their comments and feedback for

this article.

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