The Effect of Local Government Income on Community Welfare by Using Expenditures as Mediating Variable

Abstract

Fiscal decentralization is one of the decentralization political's consequences. This study aims to examine the effect of provincial government income on people welfare by using local government expenditure as intervening variable. The aim is to determine the effectiveness of local government's income and expenditure for community welfare. Regional income variables are fiscal balance funds (DAK, DBH, and DAU). The proxy of Community welfare is HDI. Expenditure components, as intervening variables, are capital expenditures (BM) and operation expenditures (BO). This research data is obtained from audited financial reports of provinces in Indonesia (34 provinces) and BPS website. This study used path analysis panel data to examine the direct and indirect effects between endogenous and exogenous variables mediated by two intervening variables. The results show that DAK and DBH directly has no significant effect on HDI, and DAU has a significant negative effect. Examination of the indirect effect of income on HDI, which is mediated by expenditure, shows that regional expenditure can increase the effect of income on people welfare. It can be seen from the effect of DAK and DBH on HDI, which turned out to be significant. Indirect effect of DAU on HDI remained negative but not significant. BO has a significant positive influence on welfare, while BM has a negative influence. Thus, it can be concluded that the BM conducted by the local government has not been well-targeted and managed properly.