Abstract
This paper reviews the impact of fiscal policy on investment and economic growth in Indonesia. Investment accelerates physical capital accumulation. In turn, physical capital contributes to economic growth. Using vector error correction approach, we find significant relationships between fiscal policy variables and investment. Government revenue and current expenditure influence investment negatively. On the other hand, government development expenditure increases investment and economic growth. The implication is development expenditure may be utilized to enhance economic growth. Moreover, budget deficits might serve the objective of long-run economic growth as far as fiscal sustainability and resilience can be maintained.
Highlights
Developing countries need to achieve high and sustainable economic growth
The endogenous variables included in the cointegration analysis are investment, income, government development expenditure, government current expenditure, government revenue and openness
This paper reviews the relationships among fiscal variables, investment and economic growth
Summary
Developing countries need to achieve high and sustainable economic growth. In 2008 average GNI per capita of the world was $8,654 (World Bank, 2010). The average per capita income of low income and lower middle income countries were $524 and $2,073 respectively. The population of these countries constitutes 70% of the world’s population. The low income countries have to quadruple its per capita income to be in the same position as the lower middle income countries. The lower middle income countries have to quadruple its per capita income to achieve the world’s average. The only way to attain these objectives is to achieve high and long-run economic growth
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