Vertical Fiscal Imbalance and Public Service Expenditure: Effects on Economic Growth Before and During Covid-19 Pandemic

Abstract

Since 2020, Indonesia has been facing the Covid-19 pandemic for 2 years. Many impacts caused by the Covid-19 pandemic, especially on the economy, have led to a recession. Regional revenues are disrupted during a recession so local governments depend on central government transfer funds. From these issues, researchers suspect that there was a change in the decentralization conditions in East Java province during the Covid-19 pandemic as it was the province with the second largest GDP and has also experienced the greatest impact in Indonesia. This research method uses multiple linear regression with cross-sectional data from 38 district/city data units in East Java province. The results of this study are that the Decentralization Fund, Civil Service Capital Expenditure and the Human Development Index did not change before and during the Covid-19 pandemic. While the vertical fiscal imbalance has a positive influence on economic growth before the Covid-19 pandemic, the vertical fiscal imbalance has no influence on economic growth. This shows that there is another shift in priority in the use of central government finances, as state money is refocused and reallocated to deal with Covid-19. This makes development programs in other health sectors postponed.