TABLE OF CONTENT

1. Introduction .......................................................................................................... 1

2. ResearchQuestions ............................................................................................... 2

3. Research Objetives................................................................................................ 2

4. Research Benefits.................................................................................................. 2

5. Literature Review

5.1 Economic Growth .......................................................................................... 3

5.2 Regional Expenditure .................................................................................... 3

5.3 Regional Original Income ............................................................................. 4

5.4 General allocation Fund................................................................................. 4

5.5 Capital Expenditure....................................................................................... 5

6. Theoritical Framework

6.1 Influence between Economic Growth and Allocation of Capital

Expenditures......................................................................................................... 5

6.2Effect of Regional Original Income (PAD) by Allocating Capital

Expenditures......................................................................................................... 6

6.3 Effect of General Allocation Funds with Regional Expenditures.................. 6

7. Research Hypothesis

7.1Influence between Economic Growth and Allocation of Capital

Expenditures......................................................................................................... 7

7.2Effect of Regional Original Income (PAD) by Allocating

Capital Expenditures............................................................................................ 7

7.3 Effect of General Allocation Funds with Regional Expenditures.................. 8

8. Research Methods

8.1Research Object.............................................................................................. 9

8.2 Research population and sample ................................................................... 9

8.3 Research Variable .......................................................................................... 9

8.4 Research Method ........................................................................................... 9

9. References...............................................................................................................10
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1. Introduction

Economic growth is a condition of increasing income due to increased production

of goods and services. Economic growth encourages local governments to carry out
economic development by managing existing resources and creating new jobs to
influence the development of economic activities . Economic Growth in West
Sumatra in the second quarter of 2018 has increased by 3.08 percent according to the
Central Statistics Agency. (BPS) West Sumatra province.

Increased economic growth requires local governments to be responsible for

optimizing regional revenue and expenditure budgets. Regional budget is a financial
plan that is used as a guideline for regional governments in providing services to the
public. In Indonesia, the regional budget is usually called Anggaran Pendapatan
Belanja Daerah (APBD). Thus the APBD must be able to provide an overview of the
financing of various budget budgets that will be achieved according to the needs of
the community in a year.

Based on Law Number 32 of 2004, one source of regional income comes from
local taxes, the results of regional retribution, the results of wealth management. The
increase in income of a region is expected to increase investment in regional
government capital expenditures so that the quality of public services is getting better,
but what happens is that the increase in regional original income is not followed by a
significant increase in capital expenditure. Many of the regional revenues are sucked
up to finance other expenditures, such as personnel expenditure, because too much
personnel expenditure is assessed in the Regional Budget this results in reduced
allocation for capital expenditure, which is seen as having a more significant
influence on meeting public services to the public (Director General of Fiscal Balance
2012).

Based on fact, the increase in economic growth in Regional Original

Income(PAD) and Capital Expenditures is very small, whereas in the General
Allocation Fund (DAU) there is a large increase. This resulted is no role for Regional
Original Revenue to regional activities which should have been the main source of
PAD to finance regional activities, so that DAU became the main source for financing
regional activities. During this time regional expenditure was more often used for
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routine expenditure which was relatively ineffective, Therefore the local government
should change its shopping composition.

2. Research Questions

Based on introduction , so the research question are as follows :

1. Does economic growth affect the budget allocation capital expenditure?

2. Does the local revenue affect the allocation of the budget capital expenditure?

3. Does the general allocation fund affect the budget allocation capital
expenditure?

3. Research Objectives

Based on Research Question , the research objective are as follows :

1. To prove the influence of economic growth towards the allocation of Capital

Expenditures.

2. To prove the Effect of Regional Original Income towards the allocation of

Capital Expenditures.

3. To prove the Effect of the General Allocation Fund towards the allocation of
Capital Expenditures.

4. Research Benefits

benefits that can be obtained from this research are as follows :

1. For researcher , to increase knowledge and understanding of economic growth and

financial relations between the central government and local governments along with
regional financial management.

2. For the central government, to advice regarding the development of increased

regional income, so that in the future the government can develop and develop its area
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with funding sources and wealth in its area. The government minimizes funds so as
not to depend on the central government.

3. For next researchers, to provide information and references about the concept of
how the effect of Economic Growth, DAU and PAD on the Allocation of Capital
Expenditures.

5.Literature Review

5.1 Economic Growth

Economic growth is an increase in the capacity of an economy to produce goods

and services, compared from one period of time to another. Economic growth can also
be interpreted also as a process of increasing national income capacity. With the
existence of economic growth is an indication of the success of economic
development. The economy experiences growth if the level of economic activity
increases from one period to the next, meaning that the amount of goods and services
produced increases.

Increasing the number of residents by also will increase the need for food,
clothing, housing, education and health services. Existing infrastructure and
infrastructure in the area will have an impact on regional economic growth. If the
facilities and infrastructure are adequate, the community can carry out their daily
activities safely and comfortably, which will affect their increasing level of
productivity. Thus, it will attract investors to open businesses in the area.

5.2 Regional Expenditure

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According to the Law of the Republic of Indonesia Number 33 of 2004, regional

expenditures are all regional obligations that are recognized as deductions from net
worth in the period of the relevant fiscal year. In this case, regional expenditure is an
estimate of the burden of regional expenditures allocated equitably and can be used by
the entire community, especially in the provision of public services.

Based on the Decree of the Minister of Home Affairs (Kemendagri) number 29 of

2002 on article (letter q) states that regional expenditures are all regional cash
expenditures within a certain fiscal year which are a burden on the region.Regional
expenditures based on their types are divided into two namely Operational
Expenditures and Capital Expenditures. Operating Expenditures are expenditures that
provide benefits or will be used up in carrying out government operational activities
during the current year. While Capital Expenditures are expenditures that provide
benefits of more than 1 year and material value.

The following types of regional expenditure include:

1. Operational Expenditures, consisting of:

1) Employee Expenditures

2) Expenditures for Goods

3) Expenditures for interest

4) Subsidized Shopping

5) Expenditures for Grants

6) Social Aid Expenditures

7) Financial Aid Expenditures

2. Capital expenditure, consisting of:

1) Land Expenditures

2) Equipment and Machines

3) Buildings and Buildings

4) Road, Irrigation and Network Expenditures

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5) Other Fixed Assets Expenditures

3. Unexpected Expenditures

5.3 Regional Original Income (PAD)

Regional Original Income (PAD) is revenue obtained from sources of income in

the country. Regional Original Income is collected based on regional regulations that
are in accordance with the prevailing laws and regulations in Indonesia. According to
Permendagri Number 13 of 2006 PAD is separated into four types of income, namely:
regional taxes, regional levies, regionally owned company products, and regional
management results separated, and other legitimate local revenues.

5.4 General Allocation Fund (DAU)

Based on Law Number 33 of 2004 the definition of general allocation funds,

namely: "General Allocation Funds are funds originating from APBD revenues
allocated with the aim of equalizing financial capacity between regions, to fund
regional needs in the context of implementing decentralization ". Thus, the DAU will
provide certainty for the region in obtaining financing sources to finance the
expenditure needs that are its responsibility.

5.5 Capital Expenditure

Capital Expenditures are expenses incurred in the context of capital formation

they add fixed assets / inventory that provide benefits for more than one period
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accounting, including the expenditure for maintenance costs that are of a nature
maintain or increase the useful life, increase the capacity and quality of assets.

Regional revenue sources (Law Number 33 of 2004) that can used as a source of
regional expenditure derived from Revenue Regional and Financing. Regional
Revenues sourced from:

1. Regional Original Income (PAD), namely: Regional Taxes, Regional Levies,

Results of management of separated regional wealth, and other legitimate PAD.

2. Balancing Funds, namely: Profit Sharing Funds, General Allocation Funds, and
Special Allocation Funds.

3. Other legitimate income, namely: Proceeds from the sale of regional assets that
are not separated, Current Services, Interest income, Benefits of the difference
between the rupiah exchange rate against foreign currencies, and commissions.

6 . Theoretical Framework

6.1 Influence between Economic Growth and Allocation of Capital Expenditures

The government has responsible for providing the best service to the community
through a capital expenditure budget consisting of operating expenses, capital
expenditure, and other unexpected expenditures. Operational expenditure consists of
personnel expenditure, goods expenditure, interest expenditure, subsidies, grants,
social assistance, financial assistance. While Capital Expenditures consist of land
expenditure, equipment and machinery, buildings and buildings, irrigation roads, and
other fixed assets expenditure. Good economic growth must be supported by adequate
infrastructure or facilities to facilitate the economic activities of the community.
While the facilities and infrastructure are obtained from the allocation of the capital
expenditure budget that has been budgeted annually in the APBD. Thus, there is an
influence between economic growth and allocation of capital expenditure. If the
economic growth of a region is good, then the local government will continue to
increase the allocation of capital expenditure from year to year to complement and
improve facilities and infrastructure, but adjusted to the conditions and situations
during the fiscal year.
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6.2 Effect of Regional Original Income (PAD) by Allocating Capital

Expenditures

Regional Original Income (PAD) is a source of funding for the budget capital
expenditure. PAD is obtained from direct contributions from the community, such as
taxes, levies, etc. So the government should be able to manage community
contributions properly. because the community has given part of the money to the
local government. The form of public services provided by the government to the
community by providing adequate facilities and infrastructure in the area. The
procurement of infrastructure or facilities is financed from the capital expenditure
budget allocation in the APBD each year. Thus, there is an influence between
Regional Original Income (PAD) and allocation of capital expenditure. But not all
regions with high income are followed by good economic growth.

6.3 Effect of General Allocation Funds with Regional Expenditures

General Allocation Funds (DAU) comes from the transfer of APBN by the
central government to local governments. DAU is one of the financing sources for
capital expenditure to procure facilities and infrastructure in order to provide good
public services from the regional government to the community. Similar to PAD, the
difference lies in the source of funds.

A theoretical framework that describes the influence of independent variables

towards the dependent variable which is about the influence of economic growth,

regional income and general allocation funds for the capital expenditure budget

is as follows:

PICTURE 1.1
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Economic Growth (X)

Regional Original Income (X) + Capital Expendit

General Allocation Funds (X)