Financial sustainability of Indonesian local governments: The role of financial independence, efficiency, and solvency
DOI:
https://doi.org/10.26905/afr.v8i2.17987Keywords:
Budget solvency, Financial efficiency, Financial sustainability, Fiscal decentralization, Local government, Regional fiscal capacityAbstract
This study aims to analyze the determinants of financial sustainability among Indonesian local governments. A fixed-effects estimation model is employed to analyze an unbalanced panel dataset covering regencies and cities from 2021 to 2023, with a total of 940 observations, The model incorporates robust standard errors and year fixed effects, complemented by a subsample analysis comparing geographical groups in Western and Eastern Indonesia. The primary findings indicate that financial efficiency and budget solvency have positive effects on local financial sustainability, whereas financial independence and service solvency do not show statistically significant effects. Furthermore, the subsample analysis reveals a structural anomaly in Eastern Indonesia, where financial independence indicates a significant negative influence. One possible explanation is that this result might possibly be a consequence of a fragile local economic base burdened by high bureaucratic costs. The study concludes that local fiscal resilience is primarily determined by internal expenditure discipline and budget solvency, rather than by revenue expansion alone. These findings highlight the need for the central government to adopt an asymmetric fiscal decentralization policy rather than a one-size-fits-all approach and highlight the imperative for local governments to strengthen budget governance based on performance and value for money principles.
Downloads
References
Akita, T., Riadi, A. A., & Rizal, A. (2021). Fiscal disparities in Indonesia in the decentralization era: Does general allocation fund equalize fiscal revenues? Regional Science Policy & Practice, 13(6), 1842-1865. https://doi.org/10.1111/rsp3.12326
Baumol, W. J. (1967). Macroeconomics of unbalanced growth: The anatomy of urban crisis. The American Economic Review, 57(3), 415-426.
Beck, P. J., & Zorn, T. S. (1982). Managerial incentives in a stock market economy. The Journal of Finance, 37(5), 1151-1167. https://doi.org/10.1111/j.1540-6261.1982.tb03609.x
Bisogno, M., Cuadrado-Ballesteros, B., & García-Sánchez, I. M. (2017). Financial sustainability in local governments: Definition, measurement and determinants. In Financial Sustainability in Public Administration: Exploring the Concept of Financial Health. Springer.
Brusca, I., Rossi, F. M., & Aversano, N. (2015). Drivers for the financial condition of local government: A comparative study between Italy and Spain. Lex Localis, 13(2), 161. https://doi.org/10.4335/13.2.161-184(2015)
Bröthaler, J., Getzner, M., & Haber, G. (2015). Sustainability of local government debt: A case study of Austrian municipalities. Empirica, 42(3), 521. https://doi.org/10.1007/s10663-014-9261-3
Caruana, J., Brusca, I., Caperchione, E., Cohen, S., & Manes Rossi, F. (2019). Exploring the relevance of accounting frameworks in the pursuit of financial sustainability of public sector entities: A holistic approach. In Financial Sustainability of Public Sector Entities, 1–18. Springer. https://doi.org/10.1007/978-3-030-06037-4_1
Cuadrado-Ballesteros, B., Santis, S., Citro, F., & Bisogno, M. (2019). Does financial health influence the re-election of local governments? Journal of Public Budgeting, Accounting and Financial Management, 31(3), 345–363. https://doi.org/10.1108/JPBAFM-10-2018-0114
Desdiani, N. A., Sabrina, S., Husna, M., Budiman, A. C., Afifi, F. A. R., & Halimatussadiah, A. (2022). Local budget resilience in times of COVID-19 crisis: Evidence from Indonesia. Economies, 10(5), 108. https://doi.org/10.3390/economies10050108
Gardini, S., & Grossi, G. (2018). What is known and what should be known about factors affecting financial sustainability in the public sector: A literature review. In Financial Sustainability and Intergenerational Equity in Local Governments, 179–205. https://doi.org/10.4018/978-1-5225-3713-7.ch008
Ginanjar, R. A. F., Sutjipto, H., Sugiyarto, S., Rahmat, B., Hadi, S., & Sardjasasmita, A. (2025). Analysis of the impact of fiscal decentralization on regional fiscal imbalances: A cross-region case study in Java. Indonesian Treasury Review: Jurnal Perbendaharaan, Keuangan Negara dan Kebijakan Publik, 10(1). https://doi.org/10.33105/itrev.v10i1.1131
Harun, H., Mir, M., Carter, D., & An, Y. (2019). Examining the unintended outcomes of NPM reforms in Indonesia. Public Money and Management, 39(2), 86–94. https://doi.org/10.1080/09540962.2019.1580892
Honadle, B. W., Costa, J. M., & Cigler, B. A. (2003). Fiscal Health for Local Governments: An Introduction to Concepts, Practical Analysis, and Strategies. Elsevier. https://doi.org/10.1016/B978-0-12-354751-4.X5000-8
Hutauruk, M. F. (2024). Pengaruh PAD dan belanja modal terhadap kinerja keuangan pemerintah daerah kab/kota di Provinsi Sumatera Utara. Jurnal Pendidikan Tambusai, 8, 42932–42939. https://doi.org/10.31004/jptam.v8i3.20606
IFAC. (2013). Reporting on the long-term sustainability of an entity’s finances. IFAC.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 77–132. https://doi.org/10.1016/0304-405X(76)90026-X
Lekettey, E., Andriana, D., Nugraha, N., Purnomo, B. S., & Sari, M. (2026). Fiscal autonomy, intergovernmental transfers and capital expenditure: evidence from Ghana. African Journal of Economic and Management Studies, 1-16. https://doi.org/10.1108/AJEMS-12-2025-1015
Lekettey, E., Andriana, D., Nugraha, N., Sari, M., & Purnomo, B. S. (2026). Rethinking decentralization: How fiscal autonomy shapes local government efficiency through nonlinear institutional dynamics. International Journal of Development Issues, 1-20. https://doi.org/10.1108/IJDI-01-2026-0019
Lewis, B. D. (2023). Indonesia’s new fiscal decentralisation law: A critical assessment. Bulletin of Indonesian Economic Studies, 59(1), 1–28. https://doi.org/10.1080/00074918.2023.2180838
Lhutfi, I., & Sugiharti, H. (2022). Financial sustainability of local governments in Indonesia. Jurnal ASET (Akuntansi Riset), 14(1), 159–170.
López Subires, M. D., & Rodríguez Bolívar, M. P. (2017). Financial sustainability in governments. A new concept and measure for meeting new information needs. In Financial Sustainability in Public Administration: Exploring the Concept of Financial Health, 3-20. Springer. https://doi.org/10.1007/978-3-319-57962-7_1
Maggara, T. S., Putri, B. K., Frinaldi, A., & Putri, N. E. (2024). Analisis ketergantungan pemerintah daerah terhadap dana transfer pusat dan dampaknya pada kemandirian fiskal. Jurnal Manajemen Dinamis, 6(4), 34-46.
Navarro-Galera, A., Rodríguez-Bolívar, M. P., Alcaide-Muñoz, L., & López-Subires, M. D. (2016). Measuring the financial sustainability and its influential factors in local governments. Applied Economics, 48(41), 3961–3975. https://doi.org/10.1080/00036846.2016.1148260
Panda, B., & Leepsa, N. M. (2017). Agency theory: Review of theory and evidence on problems and perspectives. Indian Journal of Corporate Governance, 10(1), 74–95. https://doi.org/10.1177/0974686217701467
Pandoyo. (2024). The role of fiscal decentralization in sustainable local economic development. Sinergi International Journal of Accounting and Taxation, 2(1), 27–40. https://doi.org/10.61194/ijat.v2i1.484
Prasetyo, A. D., Mulyono, N. B., & Nugroho, L. I. (2018). Local governments' expenditures efficiencies and determinants: The case of Indonesia. International Journal of Trade and Global Markets, 11(3), 160-177.
Ritonga, I. T. (2015). Developing a measure of local government’s financial government. Journal of Indonesian Economy and Business, 29(2), 142–164. https://doi.org/10.22146/jieb.v29i2.6206
Ritonga, I., T., Clark, C., & Wickremasinghe, G. (2019). Factors affecting financial condition of local government in Indonesia. Journal of Accounting and Investment, 20(2), 1-25. https://doi.org/10.18196/jai.2002114
Rodríguez Bolívar, M. P., Navarro Galera, A., Alcaide Muñoz, L., & López Subirés, M. D. (2016). Risk factors and drivers of financial sustainability in local government: An empirical study. Local Government Studies, 42(1), 29–51. https://doi.org/10.1080/03003930.2015.1061506
Rodríguez Bolívar, M. P., Navarro Galera, A., López Subirés, M. D., & Alcaide Muñoz, L. (2018). Analysing the accounting measurement of financial sustainability in local governments through political factors. Accounting, Auditing and Accountability Journal, 31(8), 2135–2164. https://doi.org/10.1108/AAAJ-10-2016-2754
Rohmadani, D. S., Yulsiati, H., & Sari, Y. (2024). Pengaruh kemandirian keuangan daerah dan rasio utang terhadap financial sustainability pada provinsi di Indonesia. Jurnal Maneksi (Management Ekonomi dan Akuntansi), 13(3), 674-681. https://doi.org/10.31959/jm.v13i3.2411
Ryan, C., & Irvine, H. (2012). Accountability beyond the headlines: Why not-for-profit organisations need to communicate their own Expenditure Stories. Australian Accounting Review, 22(4), 353–370. https://doi.org/10.1111/j.1835-2561.2012.00192.x
Shahzeb, S. M., & Riaz, M. A. (2026). Disaggregated impact of intergovernmental transfers on government expenditure in India: a study of general and special category states. Journal of Economic and Administrative Sciences, 1–21. https://doi.org/10.1108/JEAS-07-2024-0267
Siburian, M. E. (2020). Fiscal decentralization and regional income inequality: Evidence from Indonesia. Applied Economics Letters, 27(17), 1383–1386. https://doi.org/10.1080/13504851.2019.1683139
Slembeck, T., Jans, A., & Leu, T. (2014). A politico-economic perspective on financial sustainability. Journal of Public Budgeting, Accounting and Financial Management, 26(1), 140–164. https://doi.org/10.1108/JPBAFM-26-01-2014-B006
Subires, M. D. L., Muñoz, L. A., Galera, A. N., & Bolívar, M. P. R. (2019). The influence of socio-demographic factors on financial sustainability of public services: A comparative analysis in regional governments and local governments. Sustainability (Switzerland), 11(21), 1–18. https://doi.org/10.3390/su11216008
Syahriyal, S., Abdullah, S., & Meutia, R. (2024). What determines financial sustainability in local government? Evidence from Aceh Province, Indonesia. Riset Akuntansi dan Keuangan Indonesia, 8(3), 261–274. https://doi.org/10.23917/reaksi.v8i3.3106
Wardhani, D. T., & Payamta, P. (2020). Menguji faktor determinan financial sustainability pada sektor pemerintah. Jurnal Kajian Akuntansi, 4(1), 13. https://doi.org/10.33603/jka.v4i1.3305
Winarna, J., Muhtar, M., Sutaryo, S., & Amidjaya, P. G. (2021). Government internal control system and local government administration performance: Evidence from Indonesian local governments. Public Finance Quarterly, 66(2), 88–107. https://doi.org/10.35551/PFQ_2021_S_2_5
Wällstedt, N., Grossi, G., & Almqvist, R. (2014). Organizational solutions for financial sustainability: A comparative case study from the Swedish municipalities. Journal of Public Budgeting, Accounting and Financial Management, 26(1), 181.
Additional Files
Published
How to Cite
Issue
Section
License
Copyright (c) 2025 AFRE (Accounting and Financial Review)
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Authors who publish in this journal agree to the following terms:
The copyright of the received article shall be assigned to the journal as the publisher of the journal. The intended copyright includes the right to publish the article in various forms (including reprints). The journal maintains the publishing rights to the published articles. Authors must agree to the copyright transfer agreement by checking the Copyright Notice column at the initial stage when submitting the article.
