The Effect of Household Consumption and The Government

Expenditure on Economic Growth in Indonesian

Marfis Syafri, Bernadette Robiani, Bambang Bemby Soebyakto

University of Sriwijaya, Palembang, Indonesia

Keywords: Household consumption, Government expenditure, Economic growth.

Abstract: This study aims to determine the relationship between household consumption and government spending on

economic growth in Indonesia. The method used in this study is the regression data panel, the data used is

national income data from 2010-2016. The results of the study show that household consumption variables

have a significant effect on economic growth in Indonesia. Government expenditure variables have a

significant influence on economic growth in Indonesia. Simultaneous testing results to find household

consumption and government expenditure variables affect economic growth in Indonesia. The results of the

classical assumption test do not occur heteroscedasticity, multicollinearity, autocorrelation and normality

data.

1 INTRODUCTION

Economic development is a process that aims to

make changes in the level of community welfare to be

better than the previous situation. There are three

macro indicators that serve as a measure of

development progress. These indicators are the rate of

growth, the level of job creation and price stability

(Mankiw, 2003).

Economic growth in a country is a long-term

economic problem, which continues to change every

year. In addition, economic growth can also be used

as a measuring tool to see and analyze the macro and

microeconomic developments in the country.

Economic growth can be caused by many factors. In

advanced countries, they can rely on the production

of their goods and services, but do not cover the

likelihood of their loans and the investment entering

the country (Susanti, Ikhsan, Widyanti, 2000).

Indonesia's economy Gross domestic regional

growth from 2006 increased and decreased, 2006 was

15%, 13% in 2007, 2008 increased, was in the range

of 20%, then decreased significantly in 2009 by 7%,

in 2010 increased to 13%, 2011 to 2015 in Indonesian

amounted to 4.79% decreased compared to the year

2014 of 5.02%. The weakening of the economy is in

line with various weak indicators. Growth on the

production side is in the category of information and

communication that annually grows above 10%,

while the growth characteristic on the demand side

remains at its trademark characteristic, which is

dominated by household consumption expenditure

movements that make up more than half of the total

Gross Domestic Product (GDP).

The higher household income levels, the smaller

the proportion of food expenditure on all household

expenditures. It can be said that households will be

more prosperous when the percentage of expenditure

on food is much smaller than the percentage of non-

household expenditure, household expenditure

includes all expenditures for consumption of goods

and services. Household expenditures decreased from

17% to 15% in 2006, and then increased to 16% in

2008, after a fluctuating rise and fall in 2008, with

significant decline in 2016, in the range of 5 %

(Badan Pusat Statistik Indonesia).

The role of government is very necessary in

regulating the economy, one of them is by applying

fiscal policy to allocate government expenditure in

the construction of facilities and infrastructure needed

by the community. The level of effectiveness of

government spending can be measured by how much

economic growth can be achieved, this is because

government spending is more closely related to the

regional income and expenditure budget, which can

directly affect the revenue and financing of the

region, thus affecting the direct economic growth. the

highest growth of government spending occurred in

2006, with a value of 24%, then increased and

204

Syafri, M., Robiani, B. and Bemby Soebyakto, B.

The Effect of Household Consumption and The Government Expenditure on Economic Growth in Indonesian.

DOI: 10.5220/0008438502040207

In Proceedings of the 4th Sriwijaya Economics, Accounting, and Business Conference (SEABC 2018), pages 204-207

ISBN: 978-989-758-387-2

decreased volatile and the lowest occurred in 2016

with a value of 1%.

2 LITERATURE STUDIES

2.1 Economic Growth

According to Rostow (1960), economic growth

can be interpreted as a process that causes changes in

people's lives, namely political change, social

structure, social values, and the structure of economic

activity. Whereas Kuznets, economic growth is

defined as a long-term increase in the ability of a

country to provide more and more types of economic

goods to its population where this ability grows in

accordance with technological progress, and the

institutional and ideological adjustments it needs. But

using various types of production data is very difficult

to provide an overview of economic growth achieved.

Therefore to provide a rough picture of the economic

growth achieved by a country, the measure that is

always used is the level of real national income

growth achieved.

Harrod-Domar's analysis in the economy of two

investment sectors must increase so that the economy

experiences prolonged growth and the increase in

investment is needed to increase aggregate

expenditure. In Harrod-Domar's theory, the

requirement to reach full capacity is not considered if

the economy consists of three sectors or four sectors.

Although based on the theory, it can easily be

concluded that things need to apply if aggregate

expenditure includes more components, which

include government expenditure and exports. In such

circumstances increased capital goods can be used

fully if AE = C + I + G + (X - M) where I + G + (X -

M) is equal to (I + ∆I).

2.2 National Income

Gross Domestic Product (GDP) or also referred to

as Gross Domestic Product (GDP) is the market value

of all final goods and services produced in a country

in a period (Mankiw, 2003), covering the factors of

production owned by its own citizens and those of

citizens foreigners who produce in the country.

Nanga (2005) suggests that consumption expenditure

factors are income, taste, social factors of culture,

wealth, government debt, capital gains, interest rates,

price levels, money illusion, distribution, age,

geographic location, and income distribution.

Basically, the most influential factor on consumption

is income, but cannot be influenced by other factors

which have a strong influence on people's

consumption.

The value of shopping carried out by households

to buy goods and the type of needs in a particular year

is called household consumption expenditure or in

macroeconomic analysis more commonly referred to

as household consumption. The income received by

the household will be used to buy food, buy clothes,

finance transportation services, pay for children's

education, pay for rent and buy a vehicle. These items

are purchased by households to meet their needs and

the shopping is called consumption, which is buying

goods and services to satisfy the desire to own and

use the goods.

Not all transactions carried out by households are

classified as consumption (household). Household

activities to buy a house are classified as investments.

Furthermore, some of their expenses, such as paying

for insurance and sending money to parents (or

children who are in school) are not classified as

consumption because they are not shopping for goods

and services produced in the economy (Jhingan,

2012).

The consumption theory developed by Milton

Friedman in his book entitled The Theory of the

Consumption Function in 1957 known as the theory

of permanent income on consumption suggests that

current consumption expenditure or current

consumption depends on current income or current

income and estimated income in the future or

anticipated future income (Nanga, 2005).

2.3 Government Expenditures

Government expenditure reflects government

policy. If the government has established a policy to

buy goods and services, government expenditure

reflects the costs that must be incurred by the

government to implement the policy.

(Mangkoesoebroto, 1994). Government spending

reflects government policy. If the government has

established a policy to buy goods and services,

government expenditure reflects the costs that must

be incurred by the government to implement the

policy. The relationship between government

spending and economic growth is theoretically

explained in the Keynesian Cross (Mankiw 2003)

which states that increasing government spending has

an impact on the increase in economic growth

measured through income and output levels.

Government expenditure has a theoretical basis

that can be seen from the national income balance

identity that is Y = C + I + G + (X-M) which is the

source of the legitimacy of the Keynesian view of the

The Effect of Household Consumption and The Government Expenditure on Economic Growth in Indonesian

205

relevance of government intervention in the

economy. From the above equation can be examined

that the increase or decrease in government

expenditure will increase or decrease national

income. Many considerations underlie government

decision-making in managing its expenses. The

government is not enough to only achieve the

ultimate goal of every expenditure policy.

But also must take into account the intermediate

goals that will enjoy the policy. Increasing

expenditures for the sole purpose of increasing

national income or expanding employment

opportunities is inadequate. But it must be taken into

account who will be employed or increase their

income. The government also needs to avoid

increasing its role in the economy to undermine the

activities of the private sector (Dumairy, 1997)

3 METHODS

Regression analysis in statistics is one method for

determining the causal relationship between one

variable and another. This analysis is used to

determine the degree of closeness of the relationship

between variable X and variable Y expressed by:

Y: a + b

X + b

X + e

4 RESULT AND DISCUSSION

Hausman Test

Test

Summary

Chi-Sq

Statistic

Probability

Cross-

Setion

75,5163

0,0000

Source: Data processed, 2018.

Chi Table 164,342 while the values of Chi

Statistics 75,5163, Chi-Statistic value is smaller than

Chi- Table, it means the model used is random effect.

Multicolinearity Test

Economic

growth

Household

consumpti

Government

excretion

Economic

Growth

0,8613

0,7495

Household

Consumpti

0,861

0,7344

Governmen

t Excretion

0,749

0,7344

Source: Data processed, 2018

Based on table 4.3 discovered that the toleranced

value of all independent variables <0.10. Based on

the criteria in decisioned make can be concluded that

there is no multicollinearity.

Autocorrelation Test

Durbin Watson Stat

1,8238

Source: Data processed, 2018

The values of Durbin-Watson 1.8238.Santoso

(2006) if the D-W number below -2 means there is a

positive autocorrelation, the D-W number between -

2 to +2, means there is no autocorrelation and the D-

W number above +2 means there is negative

autocorrelation. So it can be concluded there is no

autocorrelation because the values of D-W is

between -2 to +2 (Santoso, 2006).

HeteroskedasticityTest (ParkTest)

Variables

Probability

Economic Growth

0,0000

Household

Consumption

0,0213

Consumption

0,0000

Source: Data processed, 2018

Heteroskedasticity test using park test, with

probability level which become measuring

instrument, if probability value below 0,05 does not

mean heteroskedasticity.

Normality Test

Variable

Value

Jarque-Bera

87,20483

Source: Data processed, 2018

A good regression model has a normally

distributed residual value. Criteria of decision

making is normal distributed data value Jarque-Bera

value is smaller than Chi Square. Jarque-Bera value

of 87.20483 smaller than Chi Square is 164.342.

Panel Data Analyze Test

Based on test results panel data that researchers

have done then the panel data equation as follows:

SEABC 2018 - 4th Sriwijaya Economics, Accounting, and Business Conference

206

PE = 6.211109 + 0.863821 Ci, t + 3.108809 PPi,

t + ei, t

The explanation of the equation is as follows =

1. Constant 6.211109, meaning that if

consumption and government expenditure is 0, then

the contant value of Y is 6,211. If adjusted for

existing government consumption and expenditure

data, each increase of 0, then the value of economic

growth will be constant at 6.211 in 2017 and the

following year.

2. Consumption variable regression coefficient of

0.863821, meaning that any increase in consumption

of 1 unit will raise Y by 0.863821. If based on

existing economic growth data, then the growth of

economic growth in 2017 and next year with the

value of the unit of 0.863821 if there is an increase in

household consumption, and vice versa.

3. The regression coefficient of government

expenditure variable amounted to 3.108809, meaning

that any increase of government expenditure by 1 unit

will increase Y by 3,108809. Government spending

has an effect, if there is an increase and decrease in

government spending, then the value of economic

growth in 2017 and next year will increase and

decrease by 3.109909.

Coefficient of Determination (adjusted R-

squared)

Variable

Value

Adjusted R-squared

0,5275

Source: Data processed, 2018

Based on the data table, it can be seen the value

of the coefficient of determination, that is equal to

52.75%, while the remaining 41.25% influenced by

other factors not examined (Ghozali, 2013).

5 CONCLUSIONS AND

RECOMMENDATIONS

a. Variables of household consumption have a

significant effect on economic growth in Indonesia.

This is consistent with the theory that household

consumption tends to affect economic growth.

Revenue earned by households will be used to buy

food, buy clothes, finance transportation services,

pay for children's education, pay rent and purchase

vehicles.

b. Government expenditure variable has

significant effect to economic growth in Indonesia.

This is in line with the theory that there is a

relationship between government spending on

economic growth. Increased government spending

has an impact on the growth of economic growth as

measured by income and output levels.

Suggestions for further research are as follows:

a. For economic developers to pay more attention

to the rate of economic growth from other sectors that

are considered capable of affecting economic growth.

b. For the next researcher, it is suggested to add

research variable, research period to be more detail in

analyzing the economic growth that happened.

REFERENCES

Dumairy, 1997. Perekonomian Indonesia. Jakarta.

Erlangga.

Ghozali, Imam. 2013. Aplikasi Analisis Multivariate

dengan Program SPSS. Edisi Ketujuh.Semarang :

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Jhingan, M. L. 2012. Ekonomi Pembangunan dan

Perencanaan. Jakarta : Rajawali Press.

Mankiw, N. Gregory. 2003. Pengantar Ekonomi. Edisi

Kedua : Jilid Kedua. Jakarta :Erlangga

Nanga, Muara. 2005, Makro Ekonomi, PT. Raja Grafindo

Persada, Jakarta

Rostow, Walt W. 1960. The Stages of Economic Growth: a

Non-Communist Manifesto. London: Cambridge

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Singgih Santoso. 2006. Menggunakan SPSS untuk Statistik

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Indikator-indikator Makroekonomi Edisi 2. Jakarta:

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