Local Government Budget at Province in Indonesia
Dy Ilham Satria, Sri Mulyati, Muhammad Yusra, Nur Afni Yunita, and Indrayani
Department of Accounting Faculty of Economic and Bussiness Malikussaleh University, Aceh,
Indonesia
Abstract. This Research aims to to know how influence of Local Own Source
Revenue, Fiscal Balance Transfers from the Central Goverment to Regions, and
Others Legal Incomes to Local Budget at Provinve in Indonesia. Source of data
at this research is Report on Local Government Finances which in obtaining from
Local Government Budget which in the form of data about Local Government
Budget at 34 Province in Indonesia from 2013 to 2017 totally perception counted
170 Report on Local Government Finances with a period of perception during 5
year. Data analysis method used method analysis linear regression. Result of this
research indicate that Local Own Source Revenue, Fiscal Balance Transfers from
the Central Goverment to Regions, and Others Legal Incomes have an effect on
signifikan to Local Budget at Provinsi in Indonesia.
Keyword: Local budget · Local own source revenue · Fiscal balance transfers
from the central goverment to regions · Others legal incomes
1 Introduction
Indonesia is a developing country that is aggressively developing infrastructure in all
fields to increase the nation's economic growth. These various infrastructures continue
to be built and developed in all provinces in Indonesia. This of course requires a large
amount of regional expenditure. Regional expenditure itself is sourced from various
sectors, one of which is sourced from the balance fund, which consists of the General
Allocation Fund, Revenue Sharing Fund, Special Allocation Fund and the regional
portion of the central tax revenue sharing .
The balancing fund is a manifestation of the financial relationship between the
central government and the regions. Applicability of UU No. 33 Tahun 2004 [1]
concerning Fiscal Balance between the Central and Regional Governments, brought
about fundamental changes to the systems and mechanisms of regional government
management. This law confirms that for the implementation of the authority of the
Regional Government, Central Government will transfer the balance funds to the
Regional Government.
Transfers from the central government are often used as the main funding source
for regional governments to finance their main day-to-day operations, which the local
government reports in the Local Goverment Budget calculations. The purpose of this
transfer is to reduce (if not eliminate) fiscal gap between governments and ensure the
achievement of minimum public service standards.
Satria, D., Mulyati, S., Yusra, M., Yunita, N. and Indrayani, .
Local Government Budget at Province in Indonesia.
DOI: 10.5220/0010521000002900
In Proceedings of the 20th Malaysia Indonesia Inter national Conference on Economics, Management and Accounting (MIICEMA 2019), pages 585-592
ISBN: 978-989-758-582-1; ISSN: 2655-9064
Copyright
c
 2022 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
585

Based on this description, it is possible for local governments to improve welfare
and services to the community, through the regional budget which is in favor of the
people's interests. This means that the role of local governments in influencing poverty
through the Local Goverment Budget policy is expected to be able to solve the existing
poverty problem by allocating budgets that are closely related to these problems.
Others Legal Income is expected to increase regional government investment in
regional spending so that the quality of public services is better. Each region has
different financial capabilities in funding its activities, this causes fiscal imbalance
between one region and another. Therefore, to overcome this fiscal imbalance the
Government allocates funds sourced from the State Budget to fund regional needs in
the implementation of decentralization. This balancing fund from the government
whose allocation emphasizes aspects of equity and justice that are aligned with the
administration of government affairs UU No. 32 Tahun 2004 [2]. With the transfer of
funds from the center, it is hoped that the regional government can allocate other
legitimate income that it receives to finance regional expenditures in the region.
2 Literatur Review
2.1 Local Budget
Local Budget according to Government Regulation No. 58 Tahun 2005 [3], are all
expenditures from general cash accounts that reduce the equity of current funds, which
are regional obligations within one fiscal year that will not be repaid by the region.
Mardiasmo (2002) [4] defines local budget as all regional expenditures in a certain
fiscal year period that is a burden on the region. As an organization or household, the
government does a lot of expenditure (expenditure) to finance its activities. These
expenditures are not only to run the daily administration but also to finance economic
activities. Based on Permendagri No.13 Tahun 2006[5] shopping is grouped into two
namely indirect shopping and direct shopping. Indirect expenditure is spending that is
considered not directly related to the implementation of programs and activities.
2.2 Local Own Source Revenue
Halim (2001)[6] defines Local Own Source Revenue as revenue obtained by the region
from sources within its own region that are levied based on Regional Regulations and
in accordance with applicable regulations. According to UU No. 34 Tahun 2000 [7] the
Local Own Source Revenue is all regional revenue that comes from the original
economic resources of the region. Regional Revenue according to UU no. 33 Tahun
2004 [1] Article 1 is the right of a Regional Government which is recognized as adding
value to net assets in the period of the year concerned.
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3 Fiscal Balance Transfers from the Central Goverment to
Regions
3.1 Revenue Sharing Fund
Revenue Sharing Funds is a potential source of regional income and is one of the basic
capital of regional governments in obtaining development funds and meeting regional
expenditures that are not from
Local Own Source Revenue other than General Allocation
Fund and Special Allocation Fund. The revenue sharing pattern is carried out with a
certain percentage based on the producing region. Revenue Sharing Fund tax revenue.
While revenue from Revenue Sharing Fund natural resources comes from: Forestry,
General Mining, Fisheries, Petroleum Mining, Natural Gas Mining, Geothermal
Mining (Wahyuni & Adi, 2009) [8].
3.2 General Allocation Funds
According to UU No. 32 tahun 2004 [2], it is stated that for the exercise of regional
government authority, Center of Government will transfer the Balancing Fund
consisting of General Allocation Fund, Special Allocation Fund, and Revenue Sharing
Fund consisting of taxes and Natural Resources. In addition, the Regional Government
has its own funding sources in the form of Fiscal Balance Transfers from the Central
Goverment to Regions, financing, and other legal income. Policy on the use of all funds
is submitted to the Regional Government. Transfer funds from the Central Government
are expected to be used effectively and efficiently by the Regional Government to
improve its services Governments, the General Allocation Fund needs of an area are
determined using the Fiscal Gap approach, where the General Allocation Fund needs
of an area are determined by the needs of the region with regional potential. General
Allocation Fund is used to close the gap that occurs because the needs of the region
exceeds the potential of existing regional revenues (Cornia, 2010) [9].
3.3 Special Allocation Funds
Special Allocation Funds is funds sourced from the State Budget which are allocated
to regional governments to finance special activities which are regional affairs and
national priorities. The purpose of Special Allocation Funds is to reduce the burden of
special activity costs that must be borne by local governments. The use of Special
Allocation Funds is directed towards investment activities in the development,
procurement, improvement, improvement of physical facilities and infrastructure of
public services with a long economic life, with the directed use of Special Allocation
Funds for these activities is expected to improve public services realized in capital
expenditure (Forrester 1992) [10].
Local Government Budget at Province in Indonesia
587

3.4 Other Legal Incomes
Other Legal Incomes according to UU 32 Tahun 2004 [2] article 164 paragraph 1
concerning regional governments are all regional revenues other than Local Own
Source Revenue, Balancing Funds, which include grants, emergency funds, and other
income determined by the government. Any regional expenditure that will be issued by
the regional government is first budgeted in the Local Goverment Budget. In
Permendagri No. 13 Tahun 2006 [5] Article 122 states that expenditures cannot be
charged to the budget if these expenditures are not available or not sufficiently available
in the Local Goverment Budget. Local Own Source Revenue, balance funds and other
legal income are sources of regional income. This means that the regional government
will adjust the regional expenditure that will be issued with the
Local Own Source
Revenue
received, the balance funds transferred from the center and other legitimate
regional revenues.
3.5 The Effect of Local Own Source Revenue to Local Budget
Several studies have been conducted to see the effect of regional income on spending.
Abdullah and Halim (2003)[11] found that the tax-spend hypothesis applies to the case
of regional goverment in several Latin American countries, namely Columbia, the
Dominican Republic, Honduras, and Paraguay. Friendman (1978)[12] states that the
tax will increase regional spending, so that it will increase the deficit. Hoover and
Sheffrin (1992)[13] empirically found differences in relations in two different time
frames. They found that for the data sample before the mid-1960s taxes affected
spending, while for the sample data after the 1960s taxes and expenditure did not affect
each other (causally independent). Satria & Munandar (2013)[14] states that changes
in the target of Regional Original Revenue can affect the allocation of expenditure
changes in the same year. From the perspective of agency theory, at the time of pure
Local Goverment Budget compilation, the executive (and possibly also with the
knowledge and or legislative agreement) Local Own Source Revuenue targets are set
below the potential, then carried out adjusment when the budget changes are made.
H1: The Local Own Source Revenue influences to Local Budget in Provinces in
Indonesia
3.6 Effect of Fiscal Balance Transfers from the Central Goverment to
Regions to Local Budget
Local Goverment Budget which includes local government revenue and expenditure
can be used as a reflection of the policies taken by the government. Government policy
in every purchase of goods and services for the implementation of a program reflects
the amount of costs that will be incurred by the government to implement the program.
Mardiasmo (2004: 63) [15]states that there are several reasons for the importance of
the public sector budget, namely: (a) The budget is a tool for the government to direct
socio-economic development, ensure sustainability, and improve the quality of life of
the community, (b) the budget is needed because of the problem of limited resources.
The budget composition should ideally be reversed, where direct spending can be
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greater. The composition of the budget that is not ideal can make it difficult for local
governments to carry out development because of the lack of funds to finance
infrastructure development needed by the community in an effort to increase economic
growth, whereas in the regional budget, regional governments also receive budget
support from the central government.
H2: Fiscal Balance Transfers from the Central Goverment to Regions influences to
Local Budget Provinces in Indonesia
3.7 The Effect of Others Legal Income to Local Budget
Others Legal Income are other revenues from the central government and / or from
central agencies, as well as from other regions. The greater the revenue Other
Legitimate Revenues the more it reflects a region or province capable of being
independent to offset budgeted regional expenditure expenditures, Sumarni (2008)[16].
H3: Others Legal Income influences to Local Budget in Provinces in Indonesia
Fig.1. Research Framework.
4 Research Methods
The population in this study is the Report on Local Government Finances which in
obtaining from Local Government Budget which in the form of data about Local
Government Budget at Province in Indonesia. In this study using the census method,
namely by taking the entire population. The object of research is the Regional Budget
in Indonesia. In this study, the location of the study is the center of financial data for
provinces in Indonesia with a data center obtained from the Directorate General of
Fiscal Balance, Ministry of Finance of the Republic of Indonesia.
The data collection technique uses documentation. In this study, the data used are times
series data in the form of Local Goverment Budget data, the time period from 2013 to
2017. The analytical method used in this study is simple linear regression which aims
to test and analyze the effect of the Local Own Source Revenue to Local Budget in the
provinces in Indonesia. The linear regression model in this study is as follows:
Y = α + β
1
X
1
+ β
2
X
2
+ β
3
X
3
+ e (1)
Local Own Source Revenue
Local Budget
Fiscal Balance Transfers
from the Central
Others Legal Income
Local Government Budget at Province in Indonesia
589

5 Results
Descriptive statistical results for Local Budget (LB), Local Own Source Revenue
(LOSR), Fiscal Balance Transfers from the Central Goverment to Regions (FBTCGR),
and Others Legal Incomes (OLI), can be seen in the following Table 1:
Table 1. Descriptive Research Data.
Va
r
N Min Max Mean Std. Dev
LB
LOSR
FBTCGR
OLI
170
170
170
170
77,8
1,3
87,8
1,1
51.066,0
43.901,5
18.969,2
11.819,5
7,2
3,7
2.5
1.1
8,4
6,6
2,5
2,0
Based on table 1, the Regional Expenditure Budget Results for 5 years, from 2013
to 2017, the mean value of 7.2 trillion Rupiahs, the minimum value of regional
expenditures of 77.8 billion for North Kalimantan Province in 2013 whereas the
maximum value for Regional Expenditures is 51.0 Trillion Rupiahs for DKI Jakarta
Province in 2017. The standard deviation value for 3 years of observation is 8.4. The
next variable is Regional Original Revenue obtained a mean value for 5 years
amounting to 3.7 trillion Rupiahs, with a minimum value of 1.3 billion Rupiahs for
North Kalimantan Province in 2013, and a maximum value of 43.9 trillion Rupiahs
obtained by DKI Jakarta Province in 2017. The standard deviation value for 5 years of
observation was 6.6.
The next variable is the Fiscal Balance Transfers from the Central Goverment to
Regions a mean value for 5 years of 2.5 trillion Rupiahs, with a minimum value of 87.8
billion Rupiahs for East Nusa Tenggara Province in 2017, and a maximum value of
18.9 trillion Rupiahs obtained by DKI Jakarta Province in 2017. The standard deviation
value for 5 years of observation was 2.5. Other Legal Incomes obtained a mean value
for 5 years of 1.2 trillion Rupiahs, with a minimum value of 1.2 billion Rupiahs for the
Kepulauan Riau Province in 2017, and a maximum value of 11.8 trillion Rupiahs
obtained by Aceh Province in 2017. The standard deviation value for 5 years of
observation was 2.0.
The results of hypothesis testing using linear regression from the influence of the
Local Own Source Revenue, Fiscal Balance Transfers from the Central Goverment to
Regions, and Others Legal Incomes to Local Budget in Provinces in Indonesia can be
seen in the following:
Y = 4,605 + 0,891 X1 + 0,858 X2 + 1,034 X3 + e (2)
The Local Own Source Revenue had a positive effect on Local Budget in Provinces
in Indonesia. This means that the Local Own Source Revenue also increase Local
Budget. These results explain that provinces that get large Local Own Source Revenue
will tend to have large Local Budget as well. These results provide a strong indication
that the behavior of regional spending will be strongly influenced by sources of
revenue, one of which is from local own source revenue. The greater the acceptance of
the Local own source revenue, the more it reflects a region or province capable of being
independent to offset budgeted local budget expenditures.
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In Indonesia, in general, Local Own Source Revenue are allocated to Capital
Expenditure, Local Own Source Revenue Budgets are also allocated for employee
operational expenditure. That is because personnel expenditure will be expected to
improve the performance of the regional apparatus to continue trying to improve public
services, the provision of adequate infrastructure facilities. Furthermore, it can also
improve the administrative capabilities of tax collection and levies in the region so that
an important source of regional revenue namely the Local Own Source Revenue can be
used to finance both physical and non physical development (Satria & Mnandar,
2017)[14].
This was also expressed by Abdullah (2013) [14] who stated that changes in income,
especially Local Own Source Revenue, could be based on the opportunism of decision
makers, especially the bureaucracy in regional work unit. But not infrequently the
changes in the Local Government Budget also contain the political preferences of
politicians in the Assembly at Provincial.
The Balancing Fund has a positive effect on Regional Expenditure in Provinces in
Indonesia. This means that the Balancing Fund also increases Regional Expenditure.
This result explains that provinces that receive a large Balancing Fund will tend to have
large Regional Expenditures as well. These results provide a strong indication that the
behavior of regional spending will be strongly influenced by sources of revenue, one
of which is from regional own-source revenue. The greater the acceptance of the
original regional income, the more it reflects a region or province capable of being
independent to offset budgeted regional expenditure expenditures.
The Balancing Fund in addition to being allocated for Capital Expenditure, the
allocation of the Regional Original Revenue Budget is also for employee operating
expenses. That is because personnel expenditure will be expected to improve the
performance of the regional apparatus to continue trying to improve public services,
the provision of adequate infrastructure facilities.
The results of this study are in accordance with the results of Dougherty, et al.
(2003)[17] where changes in the budget were made to be more useful in the long-term
implementation of the budget cycle both before and in the future, adjustments were
made in the current fiscal year due to economic income growth which contributed to an
increase in the surplus against adjustments especially in the field of capital expenditure.
This is also in line with the results of research conducted by Sumarni (2008) [16] where
the General Allocation Fund has a positive effect on Regional Expenditures. The results
of this study are also consistent with the results of research conducted by Syukriy &
Halim (2003) [18] which states that general allocation funds affect regional government
spending. In accordance with research conducted by Sumarni (2008)[16] which shows
that general allocation funds affect regional spending.
The results showed that Other Legitimate Revenues have a positive effect on
Regional Expenditure in Provinces in Indonesia. This means that Other Legitimate
Income also increases Regional Expenditure. This result explains that provinces that
get Other Legitimate Revenues that are large will tend to have large Regional
Expenditures as well. These results provide a strong indication that the behavior of
regional spending will be strongly influenced by revenue sources, one of which is from
Other Legal Revenues. Other Legal Revenues are other revenues from the central
government and / or from central agencies, as well as from other regions. The greater
the revenue Other Legitimate Revenues the more it reflects a region or province capable
of being independent to offset budgeted regional expenditure ex
penditures.
Local Government Budget at Province in Indonesia
591

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