The Impact of Government Spending on the Human Development Index in Indonesia

Marwanto Harjowiryono¹, Roberto Akyuwen²

Executive Director, Asian Development Bank, Manila, Philippines¹

Senior Lecturer, Finance Education and Training Center Yogyakarta,

Ministry of Finance Republic Indonesia, Yogyakarta, Indonesia²

akyuwen@post.com

Abstract

Government spending has played a vital role in supporting human development in many countries. However, various challenges and constraints have caused government spending at national and local level was ineffective in increasing the degree of education, health, and economic welfare of the people. This paper is aimed to analyze the impact of government spending on the human development indicators in Indonesia. The main tool of analysis was included statistic descriptive, elasticity, and panel data regression. Besides, the political economy process in the government budget formulation was also analyzed. It was found that the government budget policy in Indonesia has been improved since the implementation of unified budget, performance based budget, and medium term expenditure framework. Furthermore, more budgets have been transferred to local governments. The data shows that both national and local governments spending were always increased in the period of 2004-2007. A similar situation was also found in the progress of Human Development Index (HDI) and its components, i.e. the average school participation, life expectancy, and per capita purchasing power parity. However, there were variations between provinces in the effectiveness of government spending on the HDI progress. Several provinces were capable in spending their budget effectively, while significant improvements were needed for the others. Different impacts were also found in eastern and western parts of Indonesia. Meanwhile, panel data regression has proved that the government spendings have had significant and positive impact on the improvement of HDI and its components. But, the HDI components were found inelastic to both government spending and per capita income. Various policy and technical efforts are valuably needed to improve budget formulation and implementation.

Keywords: budget policy, government spending, human development index.