The Effect of Fiscal Capacity and Capital Expenditure on GRDP per Capita in Regencies/Municipalities of Central Java Province, 2018–2023

Abstract

         This study examines the relationship between fiscal capacity, capital expenditure, and per capita Gross Regional Domestic Product (GRDP) in regencies/municipalities of Central Java Province during 2018–2023. Fiscal capacity is represented by local own-source revenue per capita and central government transfers per capita, while capital expenditure per capita is used to capture productive fiscal allocation. This study uses a quantitative approach with balanced panel data covering 35 regencies/municipalities over six years, resulting in 210 observations. The data are analyzed using panel regression, and the Fixed Effect Model is selected as the most appropriate model. All variables are transformed into natural logarithms, allowing the coefficients to be interpreted as elasticities. The findings show that local own-source revenue per capita has a positive and statistically significant relationship with GRDP per capita. Central government transfers per capita also have a positive and statistically significant relationship, with the largest coefficient among the fiscal variables. Meanwhile, capital expenditure per capita shows a positive but statistically insignificant relationship with GRDP per capita. These findings indicate that fiscal capacity is more closely associated with regional economic performance than capital expenditure during the observed period. The results highlight the importance of strengthening local revenue capacity, improving the productive use of intergovernmental transfers, and enhancing the effectiveness of capital expenditure allocation.