Effect Of Regional Original Revenue (PAD), Balancing Fund, Capital Expenditures And Fiscal Stress On The Financial Performance Of The Regional Government In The Regency/City Of North Sumatra Province

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Effect of Regional Original Revenue (PAD), Balancing Fund, Capital Expenditures and Fiscal Stress on the Financial Performance of the Regional Government in the Regency/City of North Sumatra Province

Introduction

The financial performance of regional governments is a crucial aspect of governance, as it directly affects the quality of public services and the overall well-being of the community. In Indonesia, regional governments are responsible for managing their own finances, including generating revenue and allocating funds for various purposes. However, the financial performance of regional governments in North Sumatra Province has been a subject of concern, with many regions facing fiscal stress and struggling to provide adequate public services.

Purpose and Methodology

The purpose of this study is to analyze the effect of Regional Original Revenue (PAD), Balancing Funds, Capital Expenditures, and Fiscal Stress on Regional Government Financial Performance in Regencies/Cities in North Sumatra Province. This study includes 33 districts/cities with data taken from 2010 to 2017. The methodology used is a saturated sampling technique, which means that the entire population is used as a sample, and data analysis is carried out by data panel regression method.

Analysis of the Effect of Variables

1. Regional Original Revenue (PAD)

Regional original income is a source of income that directly comes from the region itself. If an area is able to optimize PAD, this will have a positive impact on regional financial performance. Regions with high PAD will have more flexibility in budgeting, and this allows them to make greater investment in infrastructure and public services. For instance, a region with high PAD can invest in building new roads, schools, and hospitals, which can improve the quality of life for its citizens. On the other hand, regions with low PAD may struggle to provide basic services, such as healthcare and education.

2. Balance Funds

Balancing funds, which consist of profit sharing funds and general allocation funds, also play an important role in supporting the financial performance of local governments. With the balance fund, regions that have low PAD can still carry out government functions and provide services needed for the community. Therefore, the increase in balance funds is directly proportional to the improvement of regional financial performance. For example, a region with a low PAD can use its balance fund to provide subsidies for small businesses, which can help stimulate economic growth.

3. Fiscal Stress

Fiscal stress, which occurs when regional expenditure exceeds income capacity, can be an important indicator for local government financial performance. When a region experiences fiscal stress, the efficiency and effectiveness of financial management can be disrupted, so that it has a negative effect on public services and investment. Therefore, good and proactive management of fiscal stress can improve regional financial performance. For instance, a region that is experiencing fiscal stress can implement austerity measures, such as reducing unnecessary expenses and increasing revenue through taxation.

4. Capital Expenditures

Capital expenditure functions to purchase fixed assets that are expected to provide long-term benefits. However, this research shows that capital expenditure does not have a significant effect on local government financial performance. One possible reason is that expenditure for capital expenditure is not matched by an adequate increase in income, so it does not have an expected impact on financial performance. For example, a region that invests heavily in infrastructure may not see a corresponding increase in revenue, which can lead to financial difficulties.

Conclusion

This study illustrates that local revenues, balance funds, and fiscal stress have a significant influence on the financial performance of local governments in the Regency/City of North Sumatra Province. Good financial implementation and optimal utilization of regional revenue sources is the key to achieving better performance. On the other hand, capital expenditure must be managed carefully so as not to be a burden on the regional budget, and in order to provide maximum results in the development of local economy.

Recommendations

Based on the findings of this study, the following recommendations are made:

  1. Increase PAD: Local governments should focus on increasing PAD through various means, such as improving tax collection and increasing non-tax revenue.
  2. Manage Balance Funds: Local governments should manage balance funds effectively to ensure that they are used for the benefit of the community.
  3. Manage Fiscal Stress: Local governments should implement good financial management practices to prevent fiscal stress and ensure that they have sufficient funds to provide public services.
  4. Careful Management of Capital Expenditures: Local governments should carefully manage capital expenditures to ensure that they are aligned with the region's financial capacity and provide maximum benefits to the community.

Limitations of the Study

This study has several limitations, including:

  1. Data Limitations: The study is limited by the availability of data, which may not be comprehensive or accurate.
  2. Methodological Limitations: The study uses a saturated sampling technique, which may not be representative of the entire population.
  3. Theoretical Limitations: The study is limited by the theoretical framework used, which may not capture all the complexities of the issue.

Future Research Directions

Future research should focus on:

  1. Investigating the Impact of PAD on Regional Financial Performance: Further research should investigate the impact of PAD on regional financial performance, including the effects of increasing PAD on regional financial stability.
  2. Examining the Role of Balance Funds in Supporting Regional Financial Performance: Further research should examine the role of balance funds in supporting regional financial performance, including the effects of increasing balance funds on regional financial stability.
  3. Investigating the Impact of Fiscal Stress on Regional Financial Performance: Further research should investigate the impact of fiscal stress on regional financial performance, including the effects of managing fiscal stress on regional financial stability.
  4. Examining the Role of Capital Expenditures in Supporting Regional Financial Performance: Further research should examine the role of capital expenditures in supporting regional financial performance, including the effects of increasing capital expenditures on regional financial stability.
    Frequently Asked Questions (FAQs) about the Effect of Regional Original Revenue (PAD), Balancing Fund, Capital Expenditures and Fiscal Stress on the Financial Performance of the Regional Government in the Regency/City of North Sumatra Province

Q: What is the purpose of this study?

A: The purpose of this study is to analyze the effect of Regional Original Revenue (PAD), Balancing Funds, Capital Expenditures, and Fiscal Stress on Regional Government Financial Performance in Regencies/Cities in North Sumatra Province.

Q: What methodology was used in this study?

A: The methodology used in this study is a saturated sampling technique, which means that the entire population is used as a sample, and data analysis is carried out by data panel regression method.

Q: What are the key findings of this study?

A: The key findings of this study are that local revenues, balance funds, and fiscal stress have a significant influence on the financial performance of local governments in the Regency/City of North Sumatra Province. However, capital expenditure does not have a significant effect on local government financial performance.

Q: What are the implications of this study?

A: The implications of this study are that local governments should focus on increasing PAD, managing balance funds effectively, and managing fiscal stress to improve their financial performance. Additionally, capital expenditure should be managed carefully to ensure that it is aligned with the region's financial capacity and provides maximum benefits to the community.

Q: What are the limitations of this study?

A: The limitations of this study are that it is limited by the availability of data, which may not be comprehensive or accurate. Additionally, the study uses a saturated sampling technique, which may not be representative of the entire population.

Q: What are the recommendations of this study?

A: The recommendations of this study are that local governments should:

  1. Increase PAD through various means, such as improving tax collection and increasing non-tax revenue.
  2. Manage balance funds effectively to ensure that they are used for the benefit of the community.
  3. Manage fiscal stress by implementing good financial management practices to prevent fiscal stress and ensure that they have sufficient funds to provide public services.
  4. Carefully manage capital expenditures to ensure that they are aligned with the region's financial capacity and provide maximum benefits to the community.

Q: What are the future research directions?

A: The future research directions are to:

  1. Investigate the impact of PAD on regional financial performance, including the effects of increasing PAD on regional financial stability.
  2. Examine the role of balance funds in supporting regional financial performance, including the effects of increasing balance funds on regional financial stability.
  3. Investigate the impact of fiscal stress on regional financial performance, including the effects of managing fiscal stress on regional financial stability.
  4. Examine the role of capital expenditures in supporting regional financial performance, including the effects of increasing capital expenditures on regional financial stability.

Q: What are the policy implications of this study?

A: The policy implications of this study are that local governments should prioritize increasing PAD, managing balance funds effectively, and managing fiscal stress to improve their financial performance. Additionally, capital expenditure should be managed carefully to ensure that it is aligned with the region's financial capacity and provides maximum benefits to the community.

Q: What are the practical implications of this study?

A: The practical implications of this study are that local governments should:

  1. Develop strategies to increase PAD, such as improving tax collection and increasing non-tax revenue.
  2. Implement effective balance fund management practices to ensure that balance funds are used for the benefit of the community.
  3. Develop and implement fiscal stress management strategies to prevent fiscal stress and ensure that they have sufficient funds to provide public services.
  4. Carefully manage capital expenditures to ensure that they are aligned with the region's financial capacity and provide maximum benefits to the community.

Q: What are the theoretical implications of this study?

A: The theoretical implications of this study are that it contributes to the understanding of the factors that affect regional financial performance, including the role of PAD, balance funds, capital expenditures, and fiscal stress. Additionally, the study provides insights into the importance of effective financial management practices in supporting regional financial performance.