The effect of political budget cycle on local governments’ financial statements in a young democracy

IMPACT

This article investigates whether the political budget cycle exists among local governments in Indonesia by examining if there are significant decreases in surplus and cash holdings and increases in current liabilities around election years. Investigating the political budget cycle in Indonesia is important because it is a young democracy where the political budget cycle is usually more prevalent. As local governments’ financial reports are publicly available, concerned citizens can use the financial reports to detect the presence of political budget cycles and to assess their magnitude. This increases budget transparency which, in turn, increases accountability to voters—particularly at the local level.

ABSTRACT

This article examines whether the political budget cycle exists among local governments in Indonesia, which are characterized by limited discretion in revenue generation, high financial dependence, and low levels of debt. Using 4,769 financial statements of local governments from 2008 to 2018, the authors found that budget surplus and cash holdings were lower before election years, confirming the relatively higher government expenditures by incumbents in the years leading up to an election. Political budget cycles were found to be stronger when mayors were eligible for re-election and when local governments were relatively less developed.

KEYWORDS:

• Budget surplus
• cash holding
• Indonesia
• local government
• political budget cycle
• young democracy

Disclosure statement

No potential conflict of interest was reported by the author(s).