DOI: https://doi.org/10.14710/jil.24.4.960-970

Local Government Expenditure and Environmental Quality in Indonesia: The Role of Spatial Dependence

1Badan Pusat Statistik Kota Banjarmasin, Indonesia, Indonesia

2Program Pascasarjana Ilmu Ekonomi, Fakultas Ekonomi dan Bisnis, Universitas Indonesia, Depok, Indonesia, Indonesia

3Program Studi Ekonomi Pembangunan, Fakultas Ekonomi dan Bisnis, Universitas Riau, Pekanbaru, Indonesia, Indonesia

Received: 25 Jan 2026; Revised: 23 Aug 2026; Accepted: 24 Aug 2026; Available online: 30 Aug 2026; Published: 1 Sep 2026.
Editor(s): Budi Warsito

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Abstract
Environmental quality remains uneven across Indonesian provinces, while the effectiveness of subnational environmental expenditure is uncertain because it may depend on institutional conditions and cross-regional linkages. This study aims to assess how provincial environmental-function expenditure affects environmental quality in Indonesia while accounting for spatial dependence and the moderating roles of per capita income and regional democracy. This study examines a panel of 33 provinces from 2011 to 2019 using the STIRPAT framework and a dynamic spatial autoregressive (SAR) panel model with fixed effects. The conditional marginal effect of expenditure is jointly evaluated with its interactions with per capita income and democracy at the median values of both moderators. The combined conditional marginal effect is small and statistically insignificant for the environmental quality index (IKLH), air quality index (IKU), and water quality index (IKA). Within that combined effect, the baseline expenditure component is negative and significant for IKLH and IKU; the expenditure-democracy interaction is positive and significant; and the expenditure-income interaction is insignificant. Spatial dependence is detected for all three outcomes, but indirect expenditure effects are generally smaller than direct effects; a significant spillover appears mainly for short-run air quality. The results imply that larger budgets alone do not guarantee better environmental quality. Budget-use quality, democratic institutional capacity, and cross-regional coordination are essential for converting environmental expenditure into measurable outcomes.
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Keywords: Democracy; Environmental Quality; Local Government Spending; Spatial Dependence; Spatial Dynamic Regression

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Section: Research Article
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