The Role of Financial Accountability Quality in Moderating the Impact of Fiscal Transfer Funds on Regional Government Capital Expenditure Effectiveness in Indonesia
DOI:
https://doi.org/10.30872/miceb.v7i1.15575Keywords:
Fiscal Decentralization, Intergovernmental Transfers, Capital Expenditure EffectivenessAbstract
This study examines the extent to which high-quality financial accountability moderates the relationship between fiscal transfer funds and capital expenditure effectiveness in Indonesian local governments. Using a comprehensive unbalanced panel dataset covering all 514 districts and municipalities from 2018 to 2023, capital expenditure effectiveness is measured as the ratio of realized to budgeted capital spending. Financial accountability is proxied by a lagged binary indicator of an unqualified (Wajar Tanpa Pengecualian, WTP) audit opinion issued by Indonesia’s Supreme Audit Institution (BPK). Fixed-effects panel regression with Driscoll-Kraay robust standard errors selected after significant Chow and Hausman tests reveals two key findings: (1) fiscal transfers exert a positive and significant direct effect on capital expenditure effectiveness, and (2) this effect is substantially stronger and more statistically robust in local governments that demonstrate high financial accountability. The positive and highly significant interaction term indicates that strong accountability acts as a powerful catalyst, amplifying the developmental impact of transfers and mitigating risks of inefficiency and absorption failure. These results are robust to alternative transfer definitions, two-way fixed effects, dynamic panel GMM, and instrumental-variable specifications. The evidence implies that improving capital expenditure performance in decentralized systems requires not only larger transfers but, more importantly, parallel investments in governance quality and external audit discipline. Policy mechanisms that link a portion of future transfer allocations to sustained unqualified audit opinions could create effective incentives for accountability enhancement and ultimately foster more equitable regional development
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