Fiscal Policy, Investment and Long-Run Economic Growth: Evidence from Indonesia

This paper reviews the impact of fiscal policy on investment and economic growth in Indonesia. Investment accelerates physical capital accumulation. In turn, physical capital contributes to economic growth. Using vector error correction approach, we find significant relationships between fiscal policy variables and investment. Government revenue and current expenditure influence investment negatively. On the other hand, government development expenditure increases investment and economic growth. The implication is development expenditure may be utilized to enhance economic growth. Moreover, budget deficits might serve the objective of long-run economic growth as far as fiscal sustainability and resilience can be maintained