THE EFFECT OF FISCAL POLICY ON ECONOMIC GROWTH CASE STUDY IN INDONESIA.

THE EFFECT OF FISCAL POLICY ON ECONOMIC GROWTH CASE STUDY IN INDONESIA

THESIS

This is submitted in partial fulfillment of the requirements for the bachelor degree

By :

FANNY OKTIVIA DENOVIS 0910514021

Bachelor Degree of Economics Department Faculty of Economy

Andalas University Padang

This thesis has been presented in front of the examiners in the Thesis Examination and successfully passed the Thesis Examination on January 27, 2014.

The Abstract has been approved by the advisor and examiners

Signature

1. 2. 3.

FullName Dr.H.HefrizalاHandra,M.Soc.Sc Prof.H.اSjafrizal,اSE.MA Drs.اH.Masrizal,اM.Soc.Sc

Approvedاby, HeadاofاDepartmentا:ااااDr,اH.HefrizalاHandra,اM.Soc.Sc NIP.ا196510201993021001 Signature TheاAlumnusاhasاregisteredاtoاtheاfaculty/UniversityاandاhasاobtainedاTheاAlumnusاRegister Numberا: OfficerFaculty/University UniversityاAlumnusاRegistrationاNoا: NameااااااااااااااااااااااااااااااااااااااااااااااااااااااااSignature FacultyاAlumnusاRegistrationاNoا: NameااااااااااااااااااااااااااااااااااااااااااااااااااااااااSignature UniversityاAlumnus

RegistrationاNoا: FANNY OKTIVIA DENOVIS

FacultyاAlumnus RegistrationاNoا:

PERSONAL OF IDENTITY

a).اPlace/اDateاofاBirth:اPadangاPanjangا/ا29اoktoberا1991ااb).Parent’sاnameا:اSastramed & ا Evi ا Noveri ا c).Faculty:Economics ا d).Development:Economics ا e) ا Student ا Id ا No ا : 0910514021 ا f). ا Date ا of ا Examination: ا January, ا 27th ا 2014 ا g).Graduate ا Standard: Satisfaction ا h). ا GPA: ا 2,94 ا i). ا Length ا of ا Studyا Period ا : ا 4 ا year ا 5 ا month ا j). ا parent’s address:اNagariاPanyalaianاKec.اXاKotoاkab.اTanahاDatar

THE EFFECT OF FISCAL POLICY ON ECONOMIC GROWTH CASE STUDY : IN INDONESIA

Thesis by : Fanny Oktivia Denovis Thesis Advisor : Dr, H.Hefrizal Handra M.Soc.Sc

ABSTRACT

The ا objectives ا of ا theا research اareا to ا analyze ا the اeffect اof ا fiscal ا policyا on ا economic ا growth ا in Indonesia.اThisاresearchاappliesاOLSا(OrdinaryاLeastاSquares)اmethod.ااIndependentاvariablesاused inاthisاresearchاareاrecurrentاexpenditure,اdevelopmentاexpenditureاandاincomeاtaxاinاtheاperiodاof 2002-2012. اThisاresearchاindicatesا thatاfiscalاpolicyاinfuencesا theا economicاgrowthاinاIndonesia. The اcoefficient اof اdetermination ا (R2

) اshows ا that ا the ا variation ا of ا independent ا variables ا explains variationاofاdependentاvariableاbyا99.2اpercents.اFuthermore,اgovernmentاexpenditureا(recurrentاor development)ا andا income اtax ا have اsignificantlyا influencedا to اthe اgrowth ا in ا Indonesia. ا In ا other words, اeconomic ا growth ا of ا Indonesia ا will اbe ا more اprogressive اwith ا the ا raise ا of اgovernment expendituresاandاincomeاtax.ا

Appendixاا1.4اMulticollinearityاTest...ااا71

Appendixاا1.5اNormalityاTest...ااا73

CHAPTER 1

INTRODUCTION

1.1.1 _Background

Economicاdevelopmentاisاanاabsoluteاphaseاthatاshouldاbeاdoneاbyاeveryاnationاto

increase ا in ا income ا or ا we ا called ا economic ا growth. ا Economic ا growth ا and ا economic

development اareا almostا same ا but ا they ا are ا fundamentally ا different. ا Economic ا growth ا is

increaseاinاaverageاincomeاofاanاeconomy,اwhileاeconomicاdevelopmentاisاtheاincreaseاin

welfareاofاpeopleاofاthatاeconomy.

EconomicاGrowthااisاanاincreaseاinاaاcountry'sاrealاlevelاofاnationalاoutputاwhichاcan

be ا caused ا by ا an ا increase ا in ا the ا quality اand اquantity ا of ا resources, اanا improvement اin

technologyا orاinاanotherاwayاanاincreaseاinاtheاvalueاofاgoodsاandاservicesاproducedاby

everyاsectorاofاtheاeconomy.ا

EconomicاGrowthاcanاbeاmeasuredاbyاanاincreaseاinاaاcountry'sاGDPا(grossاdomestic

product).ا“Economicاgrowthاisاaاprocess,اnotاanاeconomicاpictureاinاaاgivenاperiod,اthereاare

developmentاorاchangesاandاuseاofاtime”ا(Boediono,ا1992).

Indonesia’s ا economic ا growth ا has ا beenا up ا and ا down ا in ا over ا recent ا decades, ا in

accordance ا with ا the ا conditions ا of ا the ا world ا economy. ا National ا income اis ا a ا measure ا of

economic ا growth, ا which ا isا showed اbyا fluctuating ا growth. ا The ا economic ا condition ا of

Indonesia ا as ا a ا developing ا country ا has ا not ا reached ا steady ا state ا conditions ا in ا which ا an

economyاisاalreadyاinاaاstableاandاlessاsusceptibleاtoاshocks.

Indonesia’sاeconomicاgrowthاisاinfluencedاbyاtheاvariousاshocks.اShocksاthatاmake

Indonesian’sاeconomyاisاdisruptedاeconomicاcrisisاofا1998,اnamelyاinflationا78ا%اandاGDP

decreased ا byا approximately ا 11 ا percent. ا In ا 2008 ا the ا world ا economyا was ا in ا recession ا or

globalاeconomicاrecession,اtriggeredاbyاfinancialاturmoilاinاtheاunitedاstates.اThisاfinancial

crisisاhitاcountriesاaroundاtheاworldاincludesاIndonesia.اTheاimpactاofاthisاcrisisاinاIndonesia

wasاmarkedاbyاtheاsideاofاstateاpending,اstateاspendingاonاstateاbudgetاallocationاinا2009

wasاestimatedاtoاincreaseاbyاRpا51,8اtrillion,اcompareاtoاtheاrealizationاofاtheاstateاbudgetاof

2008اwithاtotalاexpendituresاsetاatاRpا1,037.1اtrillionا(19.5اpercentاofاGDP),اdrivenاbyاan

increase ا in ا central ا government ا spending ا for ا Rp ا 23.74 ا trillion ا and ا the ا allocation ا of

budgetاtheاgovernmentاhasاbeenاableاtoاanticipateاtheاsituation,اsoاthatاeconomicاgrowthاin

Indonesiaاisاrelativelyاsafe,اaroundا6,38%ا(DataاBPS,ا2008).

اIndonesiaاisاbetterاequippedاtoاsurviveاinاthisاtimeاofاcrisisاbecauseاofاtheاexperience

learnedاfromاpreviousاcrisis.اAاcountryاmustاhasا aاgovernmentاthatاservesاasاaاeconomic

dampening ا and ا political ا turmoil ا both ا from ا domestic ا and ا abroad. ا Dampers ا are ا able ا to

stabilizeا the ا turmoil ا in ا the ا sense ا of ا aا more ا conducive ا situation ا through ا various ا policies.

Governmentاisاaاveryاimportantاactorاinاtheاeconomyاofاaاcountry.اAnاeconomicاactivityاwill

beاoptimalاifاthereاisاaاgovernmentاactivityاthereاin.

EconomicاgrowthاinاIndonesiaاisاstillاatاtheاdevelopmentاstage.اGovernmentاspending

onاGovernmentاactivitiesاthatاincludeاspendingاinاtheاpoliticalاsphereاasاwellاasاinاtheاfieldاof

economyاwhereاeverythingاhasاplannedاinاtheاbudgetاrevenueاandاexpenditureاofاtheاstate

budget. ا Managing ا sources ا ofا revenueا and ا governmentا spending, ا governmentا can ا makeا a

policyاtoاincreaseاeconomicاgrowthاsuchاasاFiscalاPolicy.

FiscalاPolicyاisاtheاgovernmentاpolicyاwhichاincludedا governmentاexpenditureاand

taxesاinاcollaborationاwithاtheاmonetaryاpolicyاwhoseاobjectiveاwasاtoاaccelerateاeconomic

growth. ا ا Government ا expenditure ا consists ا of ا recurrent ا expenditure ا and ا development

expenditure.

Recurrentاexpenditureاisاexpenditureاthatاusedاforاmaintenanceاandاoperationاofاa

government ا that ا includes ا spending ا on اpersonnel, ا goods ا expenditures, اinterest ا payments,

subsidiesاandاotherاroutineاexpenses.اThroughاroutine اexpenses,اtheاgovernmentاcanاcarry

out ا its ا mission ا in ا order ا to ا maintain ا the ا smooth ا implementation ا of ا the ا government, ا the

operations ا and ا maintenanceا of ا state ا assets, ا Government's ا responsibility ا to اthird ا parties,

protection ا of ا the ا poor ا and ا underprivileged ا and ا maintain ا economic ا stability

(Mangkoesoebroto,ا1994).

Development ا expenditure ا is ا expenditure ا incurred ا to ا finance ا development ا in ا the

economic, ا social, ا and ا public ا and ا that ا is ا to ا raise ا capital ا in ا the ا form ا of ا community

developmentاbothاphysicalاandاnon-physicalاinfrastructureاisاimplementedاinاaاgivenاperiod.

Theاfundsاareاallocatedاtoاtheاvariousاfieldsاinاaccordanceاwithاtheاprioritiesاthatاhaveاbeen

planned.اTheاroleاofاtheاdevelopmentاbudgetاisاmoreاemphasisاonاeffortsاtoاcreateاaاstable

andاconduciveاconditionsاforاtheاcontinuityاofاtheاprocessاofاeconomicاrecoveryاbyاproviding

aاstimulusاtoاtheاgrowthاofاtheاnationalاeconomy.اInاconnectionاwithاtheاmanagementاofاthe

overall ا state ا budget ا with ا limited ا financial ا resources ا available, ا the ا achievement ا of

developmentاgoalsاshouldاbeاasاoptimalاasاpossibleا(NotaاKeuanganاdanاAPBN,ا2004). Taxesا haveا a ا very ا important ا roleا in ا theا life ا of ا the ا state. ا Particularlyا in ا the

implementation ا of ا development ا because ا the ا taxes ا a ا source ا of ا stateا revenueا to ا fundا all

expensesاincludingاtheاexpensesاofاgovernment.اWhetherاit'sاforاrecurrentاexpendituresاand

developmentاexpenditures.

AccordingاtoاWaluyoا(2006),اhighاeconomicاgrowthاwillاincreaseاtheاrevenueاofاthe

governmentاofاtaxesا(VATاandاincomeاtax)اasاwellاasاprovidingاemploymentاandاearningsاor

savingاforeignاexchange.

Since ا the ا purpose ا ofا taxationا andا government ا expenditure,ا both ا recurrent ا and

developmentاareاtoاsupportاnationalاeconomicاactivityاinاmaintainingاtheاmomentumاofاhigh

economicاgrowth,اandاimproveاtheاwelfareاofاtheاwholeاpeopleاofاIndonesia.اThereاforeاthe

roleا ofاgovernmentا inا theاfieldاoffiscalا policyا toا accelerateا economicا growth,اtheاauthors

triedاtoاexamineااhowاtheاeffectاofاfiscalاpolicyاonاeconomicاgrowth,اinاIndonesia.Inاthisاcase

theاgovernmentاfiscalاpolicyاareاgovernmentاexpenditureاandاtaxes.

Basedاonاtheاaboveاassumptions,اFiscalاpolicyاisاaاgovernmentاpolicyاcanاimpactاof

activitiesاagainstاtheاgovernmentاinاrunningاinاtheاfieldاofاtheاeconomyاinاindonesia.ااtoاthe

authorsاareاinterestedاinاdoingاresearchاtoاtakeاtheاtitleاofا

“The Effect Of Fiscal Policy On Economic Growth : Case Study In Indonesia”.

1.2 _{Research Question}

1. _{How ا does ا government اrecurrent ا expenditure ا influence ا economic ا growth ا in}

Indonesia?

2. _{How ا does ا government ا development ا expenditure ا influence ا economic ا growth ا in}

Indonesia?

3. _{HowاdoesاtaxesاinfluenceاeconomicاgrowthاinاIndonesia?}

1.3 _{Research objectives}

Inاaccordanceاwithاtheاaboveاproblemsاtheاpurposeاofاthisاstudyاwereاto:

1. _{Toاexamineاtheاeffectاofاgovernment اrecurrentاexpenditureاonاeconomicاgrowthاin}

Indonesia;

2. _{Toاexamineاtheاeffectاofاgovernmentاdevelopmentاexpenditureاonاeconomicاgrowth}

inاIndonesia;

3. _{ToاexamineاtheاeffectاofاtaxesاonاeconomicاgrowthاinاIndonesia.}

1.4 _{Research Advantage}

Theاadvantages ofاthisاresearchاare:

1. _{For ا I ا and ا myself, ا to ا improve ا my ا ability ا in ا writing ا report ا and ا doing ا research,}

especiallyاinاmonetaryاeconomics,اparticularlyاfiscalاpolicy.

2. _{Forاgovernmentاasاinputاforاfiscalاpolicy.}

3. _{Asاaاreferenceاforاotherاresearcherاwhoاareاinterestedاtoاstudyاinاtheاsameاfieldاwith}