Ijciet 10 01_079

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International Journal of Civil Engineering and Technology (IJCIET)
Volume 10, Issue 01, January 2019, pp. 867-875, Article ID: IJCIET_10_01_079
Available online at http://www.iaeme.com/ijciet/issues.asp?JType=IJCIET&VType=10&IType=01
ISSN Print: 0976-6308 and ISSN Online: 0976-6316
© IAEME Publication Scopus Indexed
DETERMINATION FACTORS OF FINANCIAL
DECISION AND ITS IMPACT ON ECONOMIC
GROWTH IN NORTH SUMATERA PROVINCE
Agus Tripriyono, Sirojuzilam, Erlina & Agus Purwoko*
Universitas Sumatera Utara, Medan, Indonesia
*
Corresponding Author
ABSTRACT
The economic growth of districts/cities in North Sumatra is relatively more lower
than other regions. This research found that financial decisions have a great influence
on economic growth. Local government budget determines economic growth. While
Local government budget allocates focus for routine expenditure rather than
development expenditure, so economic growth going to decrease. The study also found
that the economic environment, legal environment, political environment and social
environment determine financial decisions in a local government. Besides that the
results of the study conclude the political environment influences economic growth
while the economic environment, legal and social environment does not affect economic
growth.
Key words: Economic environment, legal environment, political environment and
social environment, economic growth, financial decisions.
Cite this Article: Agus Tripriyono, Sirojuzilam, Erlina & Agus Purwoko,
Determination Factors of Financial Decision and its Impact on Economic Growth in
North Sumatera Province. International Journal of Civil Engineering and Technology,
10(01), 2019, pp. 867–875
http://www.iaeme.com/IJCIET/issues.asp?JType=IJCIET&VType=10&IType=01
1. INTRODUCTION
Sustainable Development emphasizes the balance of the three pillars of social, economic and
environmental aspects. Regional development strategies are oriented towards meeting regional
needs to improve their functions and roles in managing social, economic, cultural, educational
and social welfare. Regional development is an important part of the development of a region,
especially in rural areas that are very vulnerable and severe to face changes on a global scale.
This change must consider aspects in sustainable development. Economic growth is an
indicator of regional development. Economic growth is also a process where there is an

Agus Tripriyono, Sirojuzilam, Erlina & Agus Purwoko
increase in the ability of the economy of a country in producing output such as goods and
services realized in the form of increasing regional income.
The economic growth of a region is greatly affected by the financial decisions of the
Regional Government. According to the International City/County Management Association
(ICMA) there are several factors that influence local government financial decisions including:
(1) Political Environment, (2) economic environment, (3) Social environment, and (4) Legal
environment. Besides that, regional revenues greatly influence the financial decisions of
regional governments. For local governments tax revenue is one of the most significant sources
of income, Peacok and Wiseman (1993)), stating that the public has a tax tolerance level, which
is a level where the public can understand the amount of tax collection required by the
government to finance government spending. Peacok and Wiseman's theory suggests that
economic development will lead to increasing tax collection even though the tax rate does not
change, and increasing tax revenue causes government spending to increase. Local
governments must manage their households independently so that the government is required
to improve its public services. Therefore, the regional budget will be illogical if the proportion
of the budget is more for routine expenditure. Development expenditure is an effort of regional
governments to increase public trust in order to improve regional economic growth. Based on
the previous explanation, it is important to conduct deeper research and analysis to find
financial decision formulas that will increase economic growth.
2. LITERATURE REVIEW
2.1. Regional Revenue and Regional Expenditure budget in the context of
implementing Decentralization
Economic growth is the process of continuously changing a country's economic condition.
Factors that influence economic growth are factors of human resources, natural resource
factors, factors of Science and Technology and Cultural Factors as well as financial decisions
of local governments. As stated in the guidelines for preparing budgeting for Local
Governments, financial decisions in regions are increasingly complex. Current regional
financial decisions are very sensitive to their political, economic, social and legal environment.
As explained earlier, ICMA stated that there were 4 main factors that influenced the financial
decisions of the regional government. In addition, regional revenues, especially local revenues,
also play a role in the financial decisions of regional governments. Regional Budget and
Expenditures (APBD) is the basis of regional financial management in a budget year. APBD
is the Regional Revenue and Regional Expenditure budget in the context of implementing
Decentralization in a particular fiscal year. Collection of all Regional revenues aims to meet
the targets set in the APBD. Likewise, all regional expenditures and ties that burden the region
in the context of implementing decentralization are carried out in accordance with the numbers
and targets set in the APBD. Because APBD is the basis of regional financial management, the
APBD is also the basis for regional financial control, inspection and supervision activities.
APBD is prepared with a performance approach, namely a budget system that prioritizes efforts
to achieve work results or output from planned cost allocations or specified inputs. The amount
of income budgeted in the APBD is a rationally measured estimate that can be achieved for
each source of income.

Determination Factors of Financial Decision and its Impact on Economic Growth in North
Sumatera Province
2.2. Political Environment
Political interests can be explained based on expenditure items in the budget, for example
routine expenditure items: there are interests of the government, civil servants. Defense and
security expenditures have the interests of the government, military, police and so on. Every
interest enters the political system through political parties that are considered capable of
fighting for the interests of each group. So that the budgetary debate has narrowed to the debate
at the level of party elites in the government or parliament. This problem cannot be separated
from the understanding between economics and politics. Every problem, both economic,
political, social and so on is inseparable from problems in other sectors. So that the analysis of
problem solving is very much needed interdisciplinary knowledge. No political party can grow
without strong financial support. Finance is needed to consolidate organizations, recruit
members, absorb aspirations, and build images, campaign, and so on. At first, all financial
needs of political parties were met by member contributions. Strong ideological relations
between political parties and members make it difficult for political parties to raise funds from
members. However, in line with changes in the social structure of society and the arrangement
of an increasingly complex system of democratic governance, there are now almost no political
parties that live entirely from membership fees (Supriyanto & Lia, 2012).
Political party assistance has been implemented in Indonesia even though the number is
still considered too small. For this reason, political party managers look for financial resources
by carrying out corrupt practices. Deviations that occur due to budget politics, new methods
are needed in formulating and managing budgets in order to provide services to the community.
Unilateral ways, fighting for groups, their own institutions are betrayal of the public. The
political position and domain of the budget has always been a debate among political experts.
Budget issues are considered as problems of government, institutions, governance, power,
ideology and policies and markets as well as socio-cultural issues, short-term political
economy. The definition of the scope and limitations of the political economy of the budget is
often considered unclear, and is everywhere. But generally budget politics is the domain of the
state's role because it is considered as an analysis of political economy studies. So that political
power is an important factor for formulating and planning budgets. The big problem of the
political economy of the budget must be interpreted as a tool to fight for people's rights rather
than discriminating against the people. In this case, the role of the state has the right to
reformulate its role and function for people's welfare (Wildavsky and Caiden, 2004).
2.3. Economic Environment
Economic factors influence financial decisions in local governments. Economic conditions or
environments such as economic cycles, inflation and interest rates greatly influence local
government decisions in allocating regional spending. The economic downturn affected
regional budgets in two main ways. First, income can decline, especially income such as sales
or income tax, which is more sensitive to the economic cycle. Second, during the recession,
state and federal revenues often hit hard, which meant that intergovernmental assistance to
local governments could decline.
Inflation creates uncertainty in the estimates of local government revenues and
expenditures. High inflation greatly influences spending allocation decisions. Indonesia as a
developing country is often faced with a high rate of inflation which is still a macroeconomic
problem that is troubling the government and society. Inflation is defined as a tendency to
increase the price of a commodity of goods and services in general and continues. The
government's policy to raise the price of fuel oil (BBM) is one of the factors triggering the high

rate of inflation in Indonesia, because directly the increase in fuel prices affects the general
price increase, especially in food commodities and other basic needs. High and unstable
inflation will disrupt economic stability, complicate planning for the business world, reduce
interest in community investment, hamper government development plans and influence the
budget structure set at the beginning of the fiscal year. Changes in interest rates can also affect
the budget, although the effect is not large at the local government level but will be very
influential at the national level because the state needs continuous loans.
2.4. Social Environment
Social environment changes such as population changes, age distribution, and significant
personal income in the regional budget. Increasing the number of population while household
costs do not change, so if the amount of costs is divided by the number of family members it
will produce a lower economic scale in other words the cost per person in the household will
be lower. Because financial obligations do not decrease in proportion to the loss of population,
communities with a declining population have difficulty reducing expenditure. Education
spending, public safety is the budget most likely to be affected by the age distribution of the
population. Several previous studies have consistently shown that personal income growth
significantly influences the size of local government budgets. High-income households often
demand more and better services from the government, although these same households are
more likely to do limited government advocacy, especially at the local government level.
2.5. Legal Environment
Legal factors that influence financial decisions are budget balance, mandate from the central
government and local tax rules. Budget balance factor must be considered in allocating regional
expenditure. Central government requires local governments to allocate education spending at
least 20% of the total budget. Both the central and provincial governments impose mandates
on local governments. This creates a problem unless the central government provides full funds
to carry out the mandate, local governments must cut other service costs. Communities will
suffer more from the recession that comes along with the mandate from the center and the
savings in regional spending.
The existence of restrictions on district/city governments to extract certain sources of
income, limit tax increases, require balance, and mandate some services and service levels, is
a combination of factors that have created enormous fiscal stress at the local government level
for three decades last one.
2.6. Local Government Revenue
Economic development in North Sumatra covers all aspects of the economy of the community,
both the lives of rural communities and urban communities, with the main goal of improving
and improving the standard of living of the people of North Sumatra. The economic
development is carried out by focusing on efforts to grow the economic sector by utilizing all
the potential that is owned, both the potential of natural resources and human resources.
2.7. Hypothesis
Based on the background of the problem, the formulation of the problem and the research
framework, the hypothesis of this study are:
1. The political environment, economic environment, social environment, legal
environment and local revenues affect financial decisions in North Sumatra Province.
2. Financial decisions affect Economic growth in North Sumatra Province.

Sumatera Province
3. RESEARCH METHOD
The population in this study is the district/city work unit in the province of North Sumatra.
Research variables consist of Variable Political Environment, Economic Environment,
Political Environment, Social Environment, Legal Environment, Local Revenue, Financial
Decision and Economic Growth. The data analysis used in this study is the Partial Least Square
(PLS) approach. PLS is a model of Structural Equation Modeling (SEM) based on components
or variants.
4. RESULT AND DISCUSSION
4.1. Result
4.1.1. Test Results of Measurement Model (Outer Model)
The test of the outer model begins with estimating or estimating parameters, namely by
calculating the PLS algorithm. Based on the output analysis, the measurement model (outer
model) can be evaluated, namely by testing the convergent validity, discriminant validity and
reliability, all items are valid and reliable questions.
4.1.2. Results of Path Coeficients Coefficient Analysis
The structural model in PLS is evaluated by using the R-square for the dependent variable and
the path coefficient value for the independent variable which then evaluates its significance
based on the t-statistical value of each path. PLS Results program algorithm in assessing the
value of path and R-square coefficients can be seen in Table 1 in the following:
Table 1 Path Coefficient Value
Variable Financial Decision (Y1) Economic Growth
Financial Decision 0.799
Political Environment (X1) 0.305 0.175
Economic Environment (X2) 0.486 -0.015
Social Environment (X3) 0.130 -0.012
Legal Environment (X4) 0.127 -0.008
Local Government Revenue (X5) 0.172 0.092
Sources: PLS Results (2019).
4.2. Discussion
4.2.1. Effect of the Political Environment on Financial Decisions
The results of the study concluded that the political environment proxied by community
involvement in the budgeting process had a positive and significant influence on financial
decisions made by the local government. Based on the previous description that political
interests affect the expenditure allocation contained in the regional government budget. Every
expenditure has interests, both the interests of the government, the community and political
interests. When viewed from central government expenditures, such as routine expenditure,
this shopping post is in the interests of the government, civil servants. The debate in the
preparation of the budget converged to the debate at the level of party elites sitting in the

government or parliament. The method used to enter political interests can be through
community surveys when political parties conduct recesses, or during musrenbang. The entry
of political interests in budgeting will have an impact on the quality of the budget in supporting
development in the region. Allocation of spending is strongly influenced by political interests.
Government financial decisions in budgeting in allocating infrastructure spending, economic
spending and socio-cultural spending depend on negotiations between the legislature and the
executive. Political interests are not always in line with the interests of regional development,
so conflicts often occur in budgeting. This problem cannot be separated from the understanding
between economics and politics. Every problem, both economic, political, social and so on is
inseparable from problems in other sectors. So that the analysis of problem solving is very
much needed interdisciplinary knowledge.
4.2.2. Effect of the Economic Environment on Financial Decisions
Economic factors greatly influence financial decisions in local governments. The results of the
study indicate that the economic environment influences financial decisions made by local
governments. This means that in determining the allocation of infrastructure spending,
economic expenditure and socio-cultural expenditure, local governments in the North Sumatra
Province consider economic factors, namely inflation, interest rates and economic cycles in the
region. Economic conditions or environments in the form of economic cycles, inflation and
interest rates greatly influence the decisions of local governments in allocating regional
spending.
High inflation greatly influences spending allocation decisions. Indonesia as a developing
country is often faced with a high rate of inflation which is still a macroeconomic problem that
is troubling the government and society. High and unstable inflation will disrupt the stability
of the economy, make planning difficult for the business world, reduce public investment
interest, hamper government development plans and influence the budget structure set at the
beginning of the fiscal year. Changes in interest rates can also affect the budget because it is
one of the basic references or assumptions in budgeting, although the effect is not large at the
local government level but will be very influential at the national level because changes in these
assumptions from the original set will affect the amount of the compensation component, both
state revenues, state expenditure, and budget deficits which lead to changes in the amount of
budget financing.
4.2.3. The Influence of the Social Environment on Financial Decisions
The social environment has a significant influence on local government financial decisions,
namely decisions in the preparation of regional income and expenditure budgets. Shopping for
general education, public safety is influenced by the age distribution of the people in the area
of the relevant regional government. Changes in population in an area will influence regional
spending decisions, because the greater the population in an area, the government will get
additional general allocation funds. One indicator of the amount of the General Allocation Fund
is the total population and area. Furthermore, the population also affects regional expenditures
because the large population in an area will be seen by development planners as the basic
capital of development but at the same time as a burden of development. Large population
numbers can also be categorized as regional assets if the community members can improve
their quality and expertise or skills so that they will increase national production.
The age distribution of residents in an area will influence regional financial decisions. One
component of expenditure that is influenced by age distribution is education spending. The
more population in school age, the greater the expenditure allocated to education spending.

Sumatera Province
Several previous studies consistently showed that personal income growth significantly
affected the size of local government budgets. High-income households often demand more
and better services from the government, although these same households are more likely to
do limited government advocacy, especially at the local government level.
4.2.4. Effect of Environmental Legal Factors to Financial Decision
Legal factors with budget balance indicators, changes in budgets and central regulations have
a positive and significant influence on the financial decisions of local governments. Budget
balance factor must be considered in allocating regional expenditure. Balance between regional
income and expenditure. Budget changes also greatly influence financial decisions. If there is
a change in income, shopping must also be adjusted. If in the year concerned, for example, the
local government sets a target of IDR100 million for one year of hotel taxes, it turns out that in
the first semester, it turns out that the target has exceeded, there will be a change in the budget
for changes regional expenditure component. Local governments can increase the number of
activities adjusted to the estimated amount of income that is usually realized in that year.
4.2.5. Effect of Regional Original Income on Financial Decisions
Local revenue is a factor that affects the budget. The financial decisions of the local government
are very dependent on the size of the local revenue. The greater the local revenue, the greater
the regional expenditure. Regional autonomy mandates the regions to be able to finance
regional needs with sources of income that are allowed to be collected by the regional
government. The size of the region's ability to increase Regional Original Revenue will be
influenced by sources of income, methods of collecting local government revenue and also
monitoring the receipt of local government revenue.
The source of income for the district / city has provisions. The distribution of central,
provincial and regency/city revenues has been regulated in government regulations, as well as
the amount of income that can be collected by the regional government has also been regulated
by law. The method of collecting local government revenue greatly affects the amount of
regional income.
4.2.6. Effect of Financial Decisions on Economic Growth
Economic growth, poverty and unemployment are certainly inseparable from the participation
of the government as policy makers and the power to use the budget to stimulate the economy
towards a better direction through the Regional Revenue and Expenditure Budget which is
certainly expected to accelerate the economy. Based on this explanation, the development of
an area with indicators of economic growth and community welfare is highly dependent on
financial decisions made by local governments. With the rapid turnaround of the economy, it
is hoped that new economic opportunities will be opened which will certainly attract workers
who have an impact on decreasing unemployment and improving people's living standards and
no longer falling into poverty. The results of this study aim to see how the government
influences through the APBD in increasing growth, reducing unemployment and reducing
poverty in North Sumatra.
5. CONCLUSION
The economic environment, legal environment, political environment, social environment and
local revenue have a significant positive effect on financial decisions in North Sumatra
Province. But only the political environment and local revenue have a significant positive effect

on regional development. This shows that the influence of the economic environment, legal
environment, and social environment is not through financial decisions. Financial decisions
have a positive and significant effect on regional development.
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