Relationship Between Government Spending and Private Investment in Indonesia

Abstract

This research wants to prove whether expansive government spending associated with the development of private investment in Indonesia will lead to crowding out of investment or crowd-in. The data is used from 1990 to 2016, with the component of government expenditure divided into three, namely routine expenditure, capital expenditure, and regional transfer funds. The analytical tool used is Co-Integration and Error Correction Model (ECM) to describe short-term and long-term relationships. The results explain that the relationship between private investment and transfer expenditure to the regions occurs crowding out of investment, both for domestic private investment and foreign private investment and is significant both in the short and long term. For routine expenditures and capital expenditure expenditures have a positive relationship with private investment or occur crowd-in, and significantly occur in domestic investment both short and long term, while in foreign private investment is not significant. The relationship between private investment and credit interest rates is negative, meaning that if there is a fiscal expansion resulting in a budget deficit financed with loans, there will be a decrease in private investment caused by an increase in loan interest rates. While the relationship between private investment and GDP is positive. Increased economic growth will attract investors to increase their investment, so it seems that the stimulation of private investment into Indonesia sees better economic growth compared to government spending. The recommendation is that transfers to the regions need to be changed in spending patterns with better control, so that the use of these funds can stimulate the entry of private investment. Whereas for central government expenditure or routine expenditure and capital expenditure should be more focused on infrastructure development and maintenance, so that it can further increase the interest of private investment to invest in

Keywords: Government Expenditures, Private Investment, Interest, and GDP, Co-Integration, ECM