Optimum Size of Government Spending in Indonesia
Optimum Size of Government Spending in Indonesia

Summary/Abstract: The purpose of this study is to analyze the optimum size of government spending that maximizes economic growth in Indonesia. This research considered non linear models in analysis of economic growth as a function of government spending and other economic variables. Using the time series data of the period 1970 - 2014, the empirical model reveals that relationship between government spending and economic growth follows the inverted U- curve. This finding confirms the existence of Armey curve for the Indonesian case. The optimum level of government spending that maximizes economic growth was found at 12.552% of GDP which is lower than the recent level. The result reflects that Indonesia is not in the safe fiscal zone. This upward trend in the share of government spending in the recent years meant that the government spent more money but it yields low economic growth. This result indicates that the country had excessive government expenditure in the 2010s, but it failed to encourage the national economy on the high stable economic growth. This paper recommends the government to evaluate the quality of allocation in order to achieve higher economic growth.

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