The Effect of Regional Financial Autonomy on Economic Growth in Aceh Province

Abstract

The condition of regional financial independence in Aceh Province is not optimal, so it is expected to affect economic growth. Previous studies have only descriptively explored the condition of the regional financial independence level in Aceh Province. They did not analyze how it affects economic growth. It is important to study this because Aceh is highly dependent on the transfer of funds from the central government. Therefore, this study will investigate the effect of financial independence, degree of fiscal decentralization, and revenue effectiveness as indicators of regional financial independence on economic growth in Aceh Province, Indonesia. The panel data regression method is used to analyze the data, where this study uses panel data consisting of 23 districts/cities in Aceh Province as cross-section data and time series data in an annual form from 2018 to 2022. The data applied were sourced from the Aceh Central Bureau of Statistics (CBS) and the Directorate General of Fiscal Balance. The findings show that financial independence has a negative and significant effect on economic growth, the degree of fiscal decentralization has a positive and significant effect on economic growth, and revenue effectiveness is not significant on economic growth. It is recommended that district/municipal governments in Aceh Province maximize financial independence to avoid being at the instructive level by increasing PAD and reducing dependence on external funds.