ANALYSIS OF TOTAL POPULATION, GOVERNMENT SPENDING AND GROSS REGIONAL DOMESTIC PRODUCT (GRDP) INFLUENCE TOWARDS LOCAL REVEANUE (PAD) (Case Study in Districts / Cities in Riau Province Period of 2010 to 2014)

(Case Study in Districts / Cities in Riau Province Period of 2010 to 2014)

ANALISIS PENGARUH JUMLAH PENDUDUK,

PENGELUARAN PEMERINTAH DAN PRODUK DOMESTIK

REGIONAL BRUTO (PDRB) TERHADAP

PENDAPATAN ASLI DAERAH (PAD)

(Studi Kasus di Kabupaten/Kota di Provinsi Riau tahun 2010-2014)

Author:

Muhammad Yusuf

20120430280

FACULTY OF ECONOMIC

UNIVERSITAS MUHAMMADIYAH YOGYAKARTA

2016

ANALYSIS OF TOTAL POPULATION, GOVERNMENT SPENDING AND GROSS REGIONAL DOMESTIC PRODUCT (GRDP) INFLUENCE TOWARDS LOCAL

REVENUE (PAD)

(Case Study in District/Cities in Riau Province on Period of 2010 to 2014)

ANALISA PENGARUH JUMLAH PENDUDUK, PENGELUARAN PEMERINTAH DAN PRODUK DOMESTIK REGIONAL BRUTO (PDRB) TERHADAP PENDAPATAN ASLI

DAERAH (PAD)

(Studi Kasus di Kabupaten/Kota di Provinsi Riau Tahun 2010-2014)

UNDERGRADUATE THESIS

In partial fulfillment for the requirement for the degree of Bachelor of Economics (Sarjana Ekonomi) at International Program for Islamic Economics and Finance (IPIEF),

Economic Department

WRITTEN BY

MUHAMMAD YUSUF

20120430280

FAKULTAS EKONOMI

UNIVERSITAS MUHAMMADIYAH YOGYAKARTA

Student Number : 20120430280

I hereby, declare that this undergraduate thesis entitled: ”ANALYSIS OF TOTAL POPULATION, GOVERNMENT SPENDING AND GROSS REGIONAL DOMESTIC PRODUCT (GRDP) INFLUENCE TOWARDS LOCAL REVENUE (PAD) (Case Study in Districts/Cities in Riau Province on Period of 2010 to 2014)” does not consist of any content that ever being purposed for any degree in other university, ideas of any research and publication of others, in exception all quotes and ideas which are purposely taken are considered as the research references and listed in the reference list. Therefore, if any violation of intellectual right is found in this study, I agree to accept any relevant academic consequences.

Yogyakarta, 22nd of August 2016

MOTTO

Berdoa, Minta Doa dan Mendoakan.

اذإ

مظعلا

دتشإ

د جلا

دتمإ

داؤفلا

ه ب

دح تإ

ل ف

ح ج ن

نسح

م تخلا

نل

درُي

اذإ ف

تغرف

صن ف

#

ىلإ

ك بر

غر ف

(Al-Insyirah: 8-9)

Orang yang paling banyak mengambil inisiatif, maka dialah yang akan banyak mendapat. Karena dia berfikir, berbuat dan banyak mendapat hasil. Hasil dan keberhasilan dari kerja

keras adalah hiburan baginya. (KH. Abdullah Syukri Zarkasyi)

Jangan tidak berbuat karena takut salah, lebih baik berbuat salah dari pada salah karena tidak berbuat.

1. My Beloved Parent.

2. My Big Family of IKABAYU and M.H Soebandi.

3. My Beloved Campus GONTOR, Darussalam Islamic Boarding School. 4. My Beloved Campus Muhammadiyah University of Yogyakarta.

5. All Lectures of International Program for Islamic Economic and Finance (IPIEF) and Economic Study Program, Muhammadiyah University of Yogyakarta.

FOREWORD

All Praises be to Allah SWT, the Almighty God, The Only One God, He has no partners, The Creator of everything in this Universe, and none Creature stand against Him. Who has given his Gracing for health and opportunity till I can finish and complete writing this Undergraduate Thesis entitled: “Analysis of Total Population, Government Spending and Gross Regional Domestic Product (GRDP) Influence towards Local Revenue (PAD), (Study Case in Districts/Cities in Riau Province 2010-2014)”. And also Peace and Salutation always delivered to our best messenger Muhammad Peace be upon Him. Who has become Uswatun Hasanah for all of us.

This Undergraduate Thesis has been structured in partial fulfillment for the requirement for the degree of Bachelor of Economics on Economic Department in Muhammadiyah University of Yogyakarta. With expectations, this Undergraduate Thesis can be used as input for related parties in region to promote the basic sector.

The completion of structuring this Undergraduate Thesis is cannot be separated from the guidance and support of various parties. Therefore, in this opportunity author would to say a lot of thanks to:

1. My highest gratitude to Almighty Allah and my Prophet Muhammad Peace be upon Him, Who has given us mercies and blessing until I can finish my undergraduate thesis without any problems.

2. My Beloved Family, especially my parents Mr. Thomas Baharuddin and Mrs. Komalasari Soebandi, who always already support me, work hard for me, for my

educational period in Muhammadiyah University of Yogyakarta, I won’t let you down,

University of Yogyakarta.

4. Dr. Nano Prawoto, SE.,M.Si., as a Dean of Economic Faculty.

5. Dr. Masyhudi Muqorrobin, S.E., Akt., M.Ec., as the Director of International Program for Islamic Economics and Finance. Muhammadiyah University of Yogyakarta.

6. Dr. Imamudin Yuliadi, S.E., M.Si., as the Head of Economic Department. Muhammdiyah University of Yogyakarta.

7. Mr. Agus Tri Basuki, S.E., M.Si., and Mr. Ayif Faturrahman, S.E., M.Si, as my supervisor in writing this Undergraduate Thesis.

8. All Lectures and staff for Economics and IPIEF: Dr. Lilies Setiartiti, SE.,M.Si, Dimas Bagus W and other Lectures, Mr. Umar, Mr. Sahlan and Mrs. Linda who has provided amazing knowledge.

9. My Beloved Campus GONTOR, Darussalam Islamic Boarding School, who has been

guiding, teaching and educating me. I’m so sorry that I cannot yet be what you want to

be. And contribute as much as I can.

10. Big Family of Himpunan Mahasiswa Ilmu Ekonomi (HIMIE) UMY, (Amar ma’ruf, Wafi, Hafid, Fadly, Endah, Malik, Adilah, Muthia, Nadia, Fitra, Haryadi, Diah,) and others.

11. Big Family of IPIEF Student, especially batch 2012. (Bima, Bayu, Fathur, Irfan, Ardi, Puguh, Andika, Adjie, Nurul, Widhia, Dini, Fitri, Lia, Caca, Fanny). Thanks for four years of togetherness.

Ahmad Saktiono, Mursyid, Faiq Asrori, Ibnu Murtadho). Thanks for helping, supporting and guiding me during writing my Undergraduate Thesis.

13. Big Family of KKN 80 (CuptheGanks) (Mamat, Eky, Tancak, Samsul, Rozi, Eky, Amin, Iman, Fatin, Ena, Bita, Dyah, Mirna, Mya, Intan, Yuni). Thanks for supporting me, for being second place to accept my weakness.

14. Team of Seven Days (Weni, Thomi, Addin, Luki). 15. Big Family of Prime Yogyakarta and AB10YK.

16. My Old Friends (Mahrus, Yahtadie, Aziz, Brongky, Wahyu, Kamal, Irfan, Zaky, Robin, Dion, Rifqy).

17. And all parties who have provided support and encouragement until this undergraduate thesis was completed.

Hopefully, this research will give benefits to anyone who needs, and there are still more weakness and mistakes, therefore, it required to criticism and best suggestions for any better results.

Yogyakarta, 22nd of August 2016

EXAMINER AGREEMENT………... iii

DECLARATION ... iv

MOTTO………. v

DEDICATION……….. vi

ABSTRACT ... vii

FOREWORD……… viii

CONTENTS ... xi

TABLES ... xiii

FIGURES ... xv

CHAPTER ONE INTRODUCTION ... 1

A. Research Background ... 1

B. Limitation Research ... 11

C. Problem Formulation Research ... 11

D. Research Purposes…... 12

E. Benefits of Research………... 12

CHAPTER TWO LITERATURE REVIEW ... 13

A. Outline of Theory and Decline Hypothesis ... 13

1. The Concept of Local Revenue ... 13

2. Sources of Regional Income ... 14

3. The Relation Between Total Population and Local Revenue ... 24

4. The Relation Between Government Spending and Local Revenue ... 25

5. The Relation Between Gross Regional Domestic Product ... 25

B. Previous Studies ... 26

C. Framework ... 31

D. Hypothesis ... 31

CHAPTER THREE RESEARCH METHODOLOGY ... 32

D. The Variables Operational Definition of Research ... 33

E. Analysis Method ………. 34

F. Selection of Model………... 38

G. Quality Test Data……… . 42

H. Statistical Analysis Regression Test………. 45

CHAPTER FOUR GENERAL DISCRIPTION ... 49

A. Local Revenue ... 49

B. Total Population ... 52

C. Government Spending ... 55

D. Gross Regional Domestic Product (GRDP) ... 60

CHAPTER FIVE ALAYSIS AND DISCUSSION ... 68

A. Classical Assumption Test ... 68

B. Model Selection ... 71

C. Estimation Results and Regression Panel Model………. 75

D. Statistic Test………. 78

E. Theoretic Test (Economic Interpretation)……… 81

F. Implication……… 90

CHAPTER SIX CONCLUSIONS, SUGGESTIONS AND LIMITATIONS ... 93

A. conclusions ... 93

B. Suggestions ... 94

C. Research Limitations……… 96

Table 1.2 Local Revenue for Districts/Cities in Riau Province

Years 2010-2014 ... ... 8 Table 1.3 Total Population in Riau Province in 2010-2014... 9 Table 1.4 Government Spending of Districts/Cities in Riau Province

Years 2010-2014 ... 9 Table 1.5 Riau Province on The Basis of Gross Regional Domestic Product

(GRDP) Series 2010 at Constant Market Prices By Category

Including Oil and Gas in 2010-2014………. 10 Table 2.1 Previous Studies ... .. 29 Table 4.1 Realization of Local Revenue in Districts/Cities According to

The Acceptance (thousands rupiahs), 201-2014 ... 50 Table 4.2 .Realization of Local Revenue in Every Districts/Cities in

Riau Province, According to The Acceptance

(thousands rupiahs), 2010-2014 ... 51 Table 4.3 Indicators of Riau Population ... 53 Table 4.4 The Distribution of Population for Districts/Cities by Gender

in Riau Province in 2013... 54 Table 4.5 Realization of the Regional Budget (APBN) Riau Province in 2014 . 56 Table 4.6 Realization of Government Spending in All Districts/Cities,

Riau Province, 2010-2014 ... 57 Table 4.7 Realization of Government Spending by The Districts/Cities

(thousands rupiahs) Riau Province in 2010-2014 ... 59 Table 4.8 The Economic Growth of Districts/Cities in Riau Province

on 2012-2014 ... 62 Table 4.9 The Economic Growth of Districts/Cities in Riau Province

2010-2014……….. 65 Table 5.1 Multicollinearity Test (Coef Covariance Matrix)………... 69

Table 5.5 Estimation Results of Independent Variables Towards

Local Revenue in Districts/Cities in Riau Province……… 74 Table 5.6 Fixed Effect Model ... 75 Table 5.7 Statistic Test ... 78

for Districts/Cities in Riau Province at 2014 ... 63 Figure 4.2 Economic Structure with Oil and Gas For Districts/Cities

Riau Province in 2010-2014.

This Study uses a quantitative approach. The research data were secondary data from 12 Districts/Cities in Riau Province in 2010-2014. The analysis model was data panel analysis with Fixed Effect Model.

The results showed that Total Population has no effect to Local Revenue. While, Government Spending and Gross Regional Domestic Product (GRDP) have positive significant effect to Local Revenue.

Keywords: Local Revenue, Total Population, Government Spending, Gross Regional Domestic Product (GRDP).

1

CHAPTER ONE

INTRODUCTION

A. Research Background

With the implementation of governance reforms in the form of regional autonomy in every county and city in Indonesia, then each region is expected to be ready in facing the implementation of regional autonomy by the central government as responsible for the implementation of the reform. Implementation of Regional Autonomy implemented with the support of personnel, equipment, and adequate financing. In the Constitution of Republic of Indonesia number 32 of 2004 explained that Regional autonomy is the devolution of government power from central government to autonomous regions to organize and manage the system of government in the Republic of Indonesia.

The implementation of regional autonomy aims to relieve the central government of burdens and unnecessary handling of domestic affairs; the central government is expected to be able to concentrate on the formulation of national macro policies that are strategic. On the other hand, the autonomous region will undergo a significant process of empowerment. It is used as a basis for regional autonomy policy (Harris in Aryanti and Indarti, tt).

Autonomous regions have the authority and responsibility to community life based on the principles of openness, participation and accountability to the public. The principle in question is more aware of local needs and services for the region, with the hope of autonomy granted to spur regional economic growth and welfare. In the Autonomous Regions, the provisions of Article 2 of the constitution no 33

of 2004 explains that the source of financing of the regions in the implementation of the decentralization comes from: 1) the local revenue, 2) the balance funds, and 3) other legitimate income (Tobing, 2015). By implementing this decentralization, local governments are expected to optimize the reception area as well as be more independent in managing finances and reduce reliance on the central government.

One indicator to measure the level of local capacity to implement regional autonomy is the Local Revenue (PAD). Regional Autonomy itself can have a positive impact for the district / city that has the potential of natural resources, but not so with the district / city are poor in natural resources, which is one of the problems facing the government district / city in general is limited funding originating from the region itself (PAD), so that the process of regional autonomy has not been able to run as it should (Aziz in Datu K., 2012).

Granting autonomy to the regions is one alternative in efforts to increase the real role and independence of the region as well as an increase in the prosperity of the people in a fair and equitable. Then the regional development carried out in a planned, comprehensive, integrated, effective, independent and sustainable can realize the life that is parallel to the other more developed regions as well as the aggregate of improved well-being of the nation and the state fair and equitable.

The local government has a necessary role in exploring and developing the potential of the region as a source of revenue that can determine the success of a region in carrying out the implementation of local development, community service and even autonomy. To that end, local governments are expected to move

3

development, especially in the development of potential revenue (PAD). The existence of regional autonomy policy, in the hope local governments can optimize the management of financial resources originating from the area local revenue. The development potential of the region's autonomy through the Local Revenue is visible from the development potential and role of the community through taxes and levies. In this current era of decentralization, the function and role of taxes as one feels very important state revenue in the form of self-reliance, independence either in planning or in the management of financial resources of the area (Aryanti and Indarti, tt).

Soleh and Rochmansyah (in Atmaja, 2011) states that the context of autonomy and decentralization is still dominated on the aid and assistance from the government, either in the form of General Allocation Fund (DAU), Funds (DBH), while the proportion of income (PAD) is relatively small, because of the presence of the General Allocation Fund (DAU) became dependency. So with the holding of fiscal decentralization, local governments are expected to optimize the reception area, so that local governments can be independent in the area of financial management and reduce dependence on the central government, both in terms of financing, construction, and management of the area.

Instead, the success of economic development and the performance of a region can be seen from several indicators, in particular of macro indicators. Macro indicators which can be analyzed and which would be material in this study is the Gross Regional Domestic Product (GRDP) which is the sum of gross value added generated an operating unit of economic activity in the region in a given period.

Regional economic growth associated with the progressive increase in the production of goods and services, as measured by the amount of the economic conditions of a region in a given period.

The total population is also an indicator of economic growth of a country or region. The high number of the population is highly correlated with the increase in the amount of labor that is considered positive in stimulating economic growth, the more the population will increase the productivity of an area, But all of it, depending on the local government and the economic system in managing human resources in the area.

Coupled with a visible indicator of government spending in the public service improvement and prosperity of the region, the regional government and parliament is expected to produce a budget that truly meets the needs of local communities in accordance with the potential of each. To see whether the area has been prepared financially to meet local autonomy, namely by looking at the sources of budget revenues it is able to close the state budget. As well as the budget allocation for development expenditure on projects that directly touch productive economic sectors, so as to improve the community economy (Datu K, 2012).

Local Revenue is the essential partner in the implementation of Development, because the funds used are owned by the local government itself. So the government has the authority to manage the fund. The local government is also responsible for managing the funds derived from local revenues, obtained from

5

the local communities who have the right to get back the funds in the form of development in the area.

In Act No. 33 of 2004 article 2 explained that the financial balance between the government and the local government is a subsystem of state finances as a consequence of the division of tasks between the government and local governments. The central government is also in charge of maintaining fiscal balance in the region, by providing matching funds. In Act No. 33 of 2004 Article 3 explains that the Balance Fund aims to reduce the fiscal gap between the government and local authorities and inter-regional governments. Balance Fund includes DBH, DAU and the Special Allocation Fund.

Prakosa (in Atmaja, 2011) said that, with the transfer of funds from the central government, local government is a source of funding for the implementation of the authority. But in reality, the transfer of these funds is the main funding source of local governments to finance their spending. The purpose of this transfer is to reduce (if not possibly eliminate) the fiscal gap between the government and ensure the achievement of the minimum standard of public services across the country. Supposed shortage of funds transfer is expected to be taken on its own funding sources are Local Revenue (PAD).Variables that can be controlled are the variables and institutional policies set by local governments, including the initial conditions of a region, increased expansion and intensification acceptance of Local Revenue (PAD), the procurement of new development, the search for new sources of revenue, regulatory changes and tariff adjustments. While the variables, that cannot be controlled are the macro variables to be studied by the

author, such as, population, government spending and Gross Regional Domestic Product (GRDP). Riau is a Developing Province in Sumatra that has a lot of potential in all aspects such trade aspect, management of industry, agriculture and tourism. All of these aspects can support economic growth in Riau. There are 12 areas. The twelfth Districts / cities in Riau can increase the income of the area, which later twelfth the area can be independent by utilizing the aspects mentioned above in each district / city. So that local governments could no longer rely on the revenues from the central government and the results can be directly felt by the local community. The increasing acceptance of Riau Province in the five-year period (2010-2014) can be seen in the table below. The level of acceptance in Riau, make them as the top three Provinces in Sumatra with the largest number of admissions. Thus, the authors assume that the amount of revenue can be increased more for the implementation of economic development in Riau Province. And it also will affect Local Government to boost revenues of the Districts/Cities in Riau Province.

7

Table 1.1

Recapitulation of Local Government Revenuesin Sumatra’s Province

Years 2010-2014

Provinces The

Acceptations

Provinces The

Acceptations

Year Revenue Financing Year Revenue Financing

ACEH 2010 6967815 1842989 JAMBI 2010 1640186 201205

2011 7610320 1306726 2011 2078807 353260

2012 9180143 1508841 2012 2654694 632401

2013 10671827 1968699 2013 2886305 690767

2014 11164408 2203620 2014 2981991 283338

Total 45594513 8830875 Total 12241983 2160971

SUMUT 2010 3885636 346533 SUMSEL 2010 3224160 315251

2011 4958482 404885 2011 3963985 390315

2012 7201840 720865 2012 5223884 477176

2013 7397986 14108 2013 5468140 521335

2014 8488644 37657 2014 7136876 280690

Total 31932588 1524048 Total 25017045 1984767

SUMBAR 2010 1920971 673887 BABEL 2010 848025 264130

2011 2071161 335221 2011 1193497 240433

2012 2922582 361250 2012 1384938 242123

2013 3147839 276751 2013 1529111 285022

2014 3497297 225000 2014 1755460 260399

Total 13559850 1872109 Total 6711031 1292107

RIAU 2010 4346845 114588 BENGKULU 2010 1000861 10570

2011 5440441 421520 2011 1166982 39679

2012 6847315 1906680 2012 1562525 197340

2013 6994646 1978313 2013 1696370 241356

2014 7126649 1150102 2014 1805516 103661

Total 30755896 5571203 Total 7232254 592606

KEPRI 2010 1853590 242174 LAMPUNG 2010 2091684 79029

2011 1876879 375005 2011 2527991 161182

2012 2473412 290738 2012 3742004 117690

2013 2843718 514289 2013 3901951 23711

2014 2970687 524313 2014 4298707 25998

Total 12018286 1946519 Total 16562337 407610

Source: BPS.go.id, Processed

Instead, the amount of Local Revenue (PAD) in Riau province also continues to increase. Local Revenue (PAD) was taken from the taxes, levies, local-owned company results and management as well as other legitimate of Local Revenue (PAD) from each Districts/ Cities in Riau. Riau Province was included in the top three provinces in Sumatra, which get the largest revenues among seven other provinces. So, the Total Revenue during five years is Rp. 30.755.896. And Aceh Province is the province with the largest revenue in Sumatra, with total revenues

reaching Rp. 45.594.513. In this case, Riau Province has increased revenues from year to year, the same as the two provinces with the largest amount of revenue other.

Table 1.2

Local Revenue for Districts/Cities in Riau Province Years 2010-2014

Year

Local Revenue

(Thousand Rupiah)

% Increase in

Local Revenue

2010

14.141.304.930

2011

17.978.024.807

27,13 %

2012

20.438.476.616

13,69 %

2013

20.549.268.122

0,54 %

2014

22.578.910.909

9,92 %

Source: BPS Riau Province, Processed

So, we can in this table that Local Revenue has increased every year. In 2011 has increased by 27.13%. In 2012 has increased by 13.69%. 2013 increased by 0.54% and in 2014 increased by 9.92%.

And Author interested to analyze the effect of macro variables to Local Revenue (PAD) in the province of Riau. The reason is the author examines in the district / city Riau province because there are 12 districts / cities in Riau Province, where the population is scattered in almost all districts / cities, with an income of each region varies. Thus, the government can manage and optimize the area fairly and equally, both in terms of development, public welfare, and other facilities that support the advancement of the region. Local governments also do not need to rely on funding from the central government.

9

Table 1.3

Total Population in Riau Province in 2010-2014

Year

Total Population

% Increase in

Total

Population

2010

5.538.367

2011

5.726.241

3,28 %

2012

5.879.109

2,67 %

2013

6.033.268

2,62 %

2014

6.188.442

2,57 %

_{Source: BPS Riau Province, processed}

In this table it can be seen that the number of people in Riau province has increased every year. In 2011 the total population increased by 3.28% in 2012 increased again to 2.67% in 2013 and 2014 still increased by 2.62% and 2.57%.

Table 1.4

Government Spending of Districts/Cities in Riau Province 2010-2014

Year

Government Spending

(Thousand Rupiah)

% Increase in

Government Spending

2010

18.051.491.048

2011

21.286.863.983

15,20 %

2012

25.427.002.061

19,45 %

2013

26.908.947.932

5,83 %

2014

27.640.093.785

2,72 %

Source: BPS Riau Province, Processed

In this table, it can be seen also that government spending has increased in accordance with the needs of the year 2011 to the year 2014 amounted to 15.20% (2011), 19.45% (2012) and 5.83% (2013), and 2.72 in (2014).

Table 1.5

Riau Province on The Basis of Gross Regional Domestic Product (GRDP)

Series 2010 at Constant Market Prices By Category Including Oil and Gas in 2010-2014

Year

GRDP

(Thousand Rupiah)

% Increase in

GRDP

2010

279.975.284,49

2011

292.123.408,95

4,34 %

2012

299.460.259,76

2,51 %

2013

301.582.584,28

0,71 %

2014

305.044.781,67

1,15 %

_{Source: BPS Riau Province, processed}

GRDP in the table can also be seen an increase every year, Riau Province in 2011 GRDP increased by 4.34%, 2.51% in 2012, the year 2013 amounted to 0.71% and in 2014 increased by 1.15%.

From the tables above it can be seen that the factors of macro variables showed an increase in each year, both of the Total Population, Government Spending and Gross Regional Domestic Product (GRDP). However, the size of Local Revenue (PAD) was influenced by economic growth. Therefore, the authors are interested in researching related to macro variables (Total Population, Government Spending and GRDP) that affect Local Revenue (PAD) in the districts/cities in Riau Province and pour results on this study entitled

"ANALYSIS OF TOTAL POPULATION, GOVERNMENT SPENDING

AND REGIONAL GROSS DOMESTIC PRODUCT (GRDP) INFLUENCE

TOWARDS LOCAL REVEANUE (PAD)” (Case Study in Districts/Cities in Riau Province Period of 2010 to 2014).

11

B. Limitations Research

The scope of this study is to analyze the influence of Total Population, Government Spending and GRDP in the districts/cities Riau Province from 2010 to 2014 period. Variables used in this research are the Total Population, Government Spending and Gross Regional Domestic Product at constant prices was obtained from the Central Statistics Agency of Riau Province.

C. Problem Formulation Research

Economic potential can be seen from several macro variables include Total Population, Government Spending and GRDP. While the local financial capacity seen from the success of local governments to dig source of revenue, especially from Local Revenue (PAD).

Based on the above, the formulation of the problem in this research is how the influence of Total Population, Government Expenditure and GRDP to revenue (PAD) with the following details:

1. Is Total Population significant effect on Local Revenue (PAD) in Riau Province 2010-2014

2. Is Government Spending a significant effect on Local Revenue (PAD) in Riau Province 2010-2014

3. Is Gross Regional Domestic Product (GRDP) significant effect on Local Revenue (PAD) in Riau Province 2010-2014

D. Research Purposes

1. To analyze the effect of Total Population towards Local Revenue (PAD) in the districts/cities Riau Province on 2010-2014.

2. To analyze the effect of Government Spending towards Local Revenue (PAD) in the districts/cities Riau Province on 2010-2014.

3. To analyze the effect of Gross Regional Domestic Product (GRDP) towards Local Revenue in the districts/cities Riau Province on 2010-2014.

E. Benefits of Research

1. As a comparison and reference for professors / lecturers to explain the influence of Total Population, Government Spending and Gross Regional Domestic Product (GRDP) of the Local Revenue (PAD).

2. As a reference in future studies, as well as enrich the research on Local Revenue (PAD).

3. As consideration for the local government in analyzing the influence of Total Population, Government Spending and Gross Regional Domestic Product (GRDP) to Local Revenue (PAD) especially in Riau Province.

13

CHAPTER TWO

LITERATURE REVIEW

A. Outline of Theory and Decline Hypothesis

1. The Concept of Local Revenue

According to the study (K, 2012) explained that the Local Revenue (PAD) is based on article 157 paragraph a of Law Number 32 Year 2004 on Central Government suggests that local governments in taking care of their own household needs to be given the sources of income or receipts of local finance for finance all activities within the framework of the implementation of the tasks of administration and development for the welfare of society as a fair and equitable, that component is derived from the results of local taxes, levies Results, wealth management area results that are separated and Other Local Revenue results are valid. The fourth component of Local Revenue is also the financial resources of the region; therefore, the original income is one component of local financial resources. Local Revenue sources are part of regional financial levied under the laws and regulations in the area.

Local Revenue importance as a source of local finance, autonomous regions must have the finances and ability to dig up the financial resources of its own, manage and use their own finances are sufficient to finance the implementation of a local authority. Dependence on central assistance should be as minimal as possible so that the Local Revenue should become part of the largest financial resources supported by the policies of central and local

financial balance as a fundamental prerequisite in the system of administration of the State (Koswara, 1999: 23) in (K, 2012).

Sources of local revenue derived from: Local Taxes, Levies local, regional wealth management results were separated, Other Local Revenue legitimate. While, The Fund Balance is consists of DBH, General Allocation Fund, and the Special Allocation Fund (Safitri, 2009) in (Atmaja, 2011).

2. Sources of Regional Income

Law Number 32 Year 2004 on Regional Government hinted that the local government in taking care of their own households is given the sources of income or financial reception area is to finance all the activities in the framework of the implementation of the tasks of government and development for the welfare of society as a fair and prosperous.

a. Local Revenue (PAD)

With Local Revenue, it can be used as an important indicator to assess the degree of independence of Local Government in the field of finance. As for the sources of Local Revenue (PAD) consisting of:

1) Results of Local Taxes

Local Tax is one of the key elements that have contributed greatly to the Local Revenue (PAD). Definition taxes are dues of the people to the state treasury, the shift of wealth (from the sector private to the government sector) by law (enforceable) does not receive the services

15

of reciprocity which can be directly appointed and is also used for general expenses (Soemitro, 1965: 19) in (Kusumastuti, 2002).

In Munawir (1990) some experts also provide an understanding of different, but still in the same meaning and purpose of the tax, some definitions are:

a) According to Soemitro, tax is people’s payment due to the state

treasury (the transition of wealth from the private sector to government sector) by the legislation (Enforceable) without getting the service of lead (Tegen Prestatie) which directly appointed and used to finance the general expenses. In other words, the tax is a wealth of transition from people to state treasury, to finance the regular expenses and it surplus can be used for public saving which is a main source to finance the public investment.

b) According to Soemamidjaja, tax is obligatory contribution in the form of money or goods levied by the authorities based on the norms of law, in order to cover the cost of production of goods and services collectively to achieve common prosperity. c) According to Djajadiningrat, tax is an obligation to give up

some of the wealth to the state caused by a state, events and actions that give a certain position but not as punishment, according to the regulations set by the government and can be

enforced, but there is no merit forth from the country directly to maintain the general welfare.

In Law No. 34 of 2000 on the amendment of Law No. 18 of 1997 on Local Taxes and Levies Article 1 (6) is a local tax, hereinafter called the tax is obligatory contribution made by an individual or entity to areas without direct payment are balanced, which can be imposed by legislation that applies, which is used to finance the implementation of local government and regional development.

According to Law No. 28 Year 2009 on Regional Taxes and Levies in Article 1 (10) is a local tax, hereinafter called the tax is a mandatory contribution to the regions that are owed by individuals or entities that are enforceable under the Act, by not getting the rewards directly and used to the area for the purposes of the overall prosperity of the people. Local tax based on the level of local government, local taxes and local taxes Provincial District / City level. In accordance with Act No. 28 Year 2009 concerning on Regional Taxes and Levies, the types of taxes are (Frediyanto, 2010):

a) Regional Tax Level I (province), consisting of:

(1) The vehicles tax and the vehicles fuel tax, tax collection and utilization of underground and surface water.

(2) Taxes of vehicle title transfer fee and Customs of Vehicle. (3) Taxes of materials motor vehicle fuel.

17

(5) Cigarette taxes.

b) Regional Tax Level II (district/city), consisting of: (1) Hotel Taxes

(2) Restaurant Taxes (3) Entertainment Taxes (4) Advertisement Taxes (5) Street Lighting Taxes

(6) Collection Excavated Material Taxes class (7) Parking Taxes

2) Results of Levies

The sources of income other important areas are levies. Levies are dominated for a reception area. Based on Law No. 34 of 2000 which meant the levies are local taxes as payment for services or certain special permits provided and / or provided by local governments for the benefit of the individual or entity (Datu K, 2012).

Prakosa (in Atmaja, 2011) said that the Levies are local taxes as payment for services or granting certain permissions are specifically provided or granted by the regional government for the benefit of private persons aau body, so that it can be concluded that the levies are retribution levied because of the existence of a fringe benefits provided by local governments levy collector.

From the definition of the levy it can be argued that some of the characteristics inherent in the notion of retribution: First; Levies

collected by the state in this regard that all local revenue collection areas of public revenue, Second; in the collection there are economics. And Third coercion; Levies imposed on any person / entity who uses the services were prepared countries (Datu, 2012).

Frediyanto (2010) The types of levies according to Law No. 28 of 2009 can be grouped into three (3) categories, namely general service levies, fees and charges licensing of certain services.:

a) Public service levies that services provided or given to local government interests and public benefit purpose and can be enjoyed by private persons or entities. Common types of levies are:

(1) Health Care Levies

(2) Service Fees Waste / Hygiene Levies

(3) Reimbursement Identity Card and Civil Certificate Levies (4) Funeral Service Fees and Aching Corps Levies

(5) General Services of Roadside Parking Levies (6) Levy of Market Services

(7) Levy of Vehicle Testing

(8) Levy Inspection of Fire Extinguishers (9) Replacement Levy of Reprinting Maps (10) Retribution Supply / Suction Latrine (11) liquid waste management levies (12) Levy of Educational Services

19

b) Business service levies are local taxes as payment for services supplied a special effort and / or provided by local governments for the benefit of private persons or entities. Types of charges for services such as:

(1) Retribution of a Wealth Usage Area

(2) Retribution of Wholesale Markets/Shopping (3) Retribution of Auctions

(4) Retribution of Terminal Charges

(5) Retribution of Special Place for Parking (6) Retribution of Venues, Home stays and Villas (7) Retribution of Slaughterhouses

(8) Retribution of Port Services

(9) Retribution of Recreation Places and Sport Areas (10) Retribution of Water Crossings

(11) Retribution of Sales Business Production Area

c) Licensing Certain Levies are local taxes as payment for the provision of certain special permission granted by the local government for the benefit of private persons or entities. Licensing levy certain types namely:

(1) Retribution of Building Permits

(2) Retribution Sale of Alcoholic Beverages (3) Retribution of Nuisance Permits

(5) Retribution of Fishery Business License

Levies are more relevant than the tax on short-term interests. This is based on the relationship it directly to the public. Society will not pay if the quality and quantity of public services is not an increase.

3) Results of Regional Wealth Management Separated

To meet the financing needs of household’s relatively large area, then the area is also provided sources of income in the form of wealth management outcomes separated areas in accordance with the Act No.32 of 2004. The management of that wealth comes from a local company established under Law Invite the whole or a part of capital riches separated areas (Datu, 2012).

Local Company category is divided into two, namely: First; PAD Company which is a company incorporated enumerated by the region itself. Second; Companies from the area supervisor. The purpose of forming a local company is to donate the local economy and increase the income of the area. BUMD business field covers various aspects of the service by prioritizing the provision of services to the community, organizing public services and contribute to the economy of the whole region should be implemented based on the principles of sound corporate economy (Financial Notes Proposed Budget 1995/1996 in

21

Local Company or local government position is very important and strategic as one of the institutions belonging to the area in increasing acceptance of PAD. Regional governments could also undertake efforts to increase revenue by optimizing the role of enterprises that are expected to function as a primary driver. This type of income includes the following income:

a) Equity in net earnings of companies owned by regional b) Section profit financial institution bank

c) Equity in net earnings of non-bank financial institutions d) The share in income on the statement of capital / investment.

4) Others Local Revenue (PAD) Lawful

These revenues are derived from the reception area outside of taxes and levies or other legitimate local government-owned and supplied to allocate reception area. According to Law No. 33 of 2004 explains the original Revenue Regional legitimate, provided for budgeted reception area is not included in these types of local taxes, and wealth management outcomes separated areas.

According to Datu Indra K, this revenue type includes objects as follows:

a) Proceeds from sales of regional assets that are not separated b) Acceptance Gyro services

d) Fine delay in the execution of work

e) Receipts for compensation for damage / loss of regional assets (Datu K, 2012).

a) Balance Fund

According to Law No. 33 In 2004, the Balance Funds are funds from the state budget allocated to the regions to fund the needs of the region in implementing of decentralization. Balance Funds consists of revenue-sharing, allocation of funds General and Special Allocation Fund (Feriyanto,2010).

1) Revenue-Sharing Fund

Revenue-Sharing (DBH) is a fund sourced from APBN allocated to the regions with the potential of producing area noticed a certain percentage to fund the needs of the region in the implementation of decentralization. DBH include:

a) Tax revenues, which are comprised of: land and building tax (PBB), fees for acquisition of land and buildings (BPHTB), the personal income tax.

b) Acceptance of Non-Tax (SDA), which consists of: forestry, mining, oil and gas sector, and natural fisheries sector.

23

2)

General Allocation Fund

Funds sourced from APBN allocated to bring equality among the regions financial ability to finance expenditure in the framework of decentralization. General Allocation Fund (DAU) an area allocated on the basis of fiscal gap and basic allocation. General Allocation Fund (DAU) allocation for regional fiscal potential is great but small fiscal needs would acquire relatively lower allocation. Conversely, a small area of fiscal potential, but needs a large fiscal will receive a relatively higher General Allocation Fund (DAU).

General Allocation Funds granted to all counties and cities for the purpose of filling the gap between capacity and fiscal needs, and is distributed by a formula based on certain principles which generally indicates that the poor and underdeveloped regions must receive more than richer regions. In other words, an important goal DAU allocation is to ensure equal distribution of public service delivery capabilities between the Local Government (Atmaja, 2011).

3)

Special Allocation Fund

Special Allocation Funds allocated to help finance certain needs, which is a national program or activity which does not exist in other area. In other words, DAK is intended to help finance specific activities certain areas that are regional affairs and in accordance with national priorities. Infrastructure is the basic services that society has not reached a certain standard or to accelerate development of the

region. DAK also come from the state budget and allocated to the district / city to finance the specific needs of particular importance, depending on the availability of funds from the state budget (Atmaja, 2011).

3. The Relations between Total Population and Local Revenue (PAD)

The Total population is essential to economic development is the driving force and executive in the economy as well as the workforce. Residents of an area can be seen from the positive and negative sides. The positive side where a large population can encourage the development itself, therefore the population factor is very important in the development plan, so that development be realistic. In the other hand, the negative impact of the population is the growing number of social and economic services to fulfill the rights of those whose numbers increase.

The Total Population is one of the deciding factors in income between regions. The addition of a population is an important element in stimulating economic growth and development. Large population is an asset for national development, but also a burden. Be an asset if it can increase national production. And become a burden if the quality, structure and distribution do not fit to become a burden on the working population effectively. Adam Smith (Santoso and Rahayu 2005 in Atmaja, 2011) Explaining that, supported by empirical evidence, a high population growth will be able to raise output by adding levels and market expansion both in domestic market and abroad.

25

4. The Relations between Government Spending and Local Revenue

(PAD)

Implementation of a regional development program requires the participation of all elements of society. Local government's role is as a facilitator would require the support of factors including the budget. Those spending are partially used as other partial development funding for local infrastructure development. The spending increase aggregate spending and economic activity levels. Infrastructure development and provision of various facilities made to increase the attractiveness of the investment. Given adequate public service facilities will stimulate people to be more active in their work so that the productivity of the community and local investment be increased, which will result in an increase in Local Revenue.

According to Wong in (K, 2012), infrastructure development have an impact on local tax increases. Taxes and charges are components of PAD in increasing the added value obtained from optimal growing industry sector. The industrial sector came from capital expenditures. Capital expenditures are capital expenditures including land, capital expenditure buildings, roads and bridges capital expenditures, capital expenditures generation tools, capital expenditures heavy equipment and other capital expenditures.

5. The Relations between Gross Regional Domestic Product and Local

Revenue (PAD)

The relationship between GRDP with Local Revenue (PAD) is a relationship that is very functional, because Local Revenue (PAD) is a

function of GRDP. The increase that occurred in GRDP effect on increasing the amount of revenue local governments in implementing development programs that will increase local government services to the public so that also increase the productivity of the region. With increasing government revenues will boost public services in hopes of improving productivity levels of society so that economic growth again increased, including the level of income per capita which is ultimately encourage people in the community's ability to pay taxes and other levies.

B. Previous Studies

Several studies have been conducted with a discussion of the analysis of the factors that affect Local Revenue in the districts/cities of Riau province is as follows:

1. Pahala Bellarminus Lumban Tobing in 2015 conducted a study entitled

Analisis Pengaruh Jumlah Pekerja, Pengeluaran Pemerintah dan Produk Domestik Regional Bruto terhadap Pendapatan Asli Daerah tahun 1999-2013 : Studi pada Malang Raya. The analytical method used is the Panel Data with multiple linear regression analysis. The results of the study explained that government spending in the form of direct spending is effective, in improving the Local Revenue. The development of infrastructure such as roads, education and improvement of Human Resource, which is part of the direct expenditure, is very important in

27

Product, showing its influence in the improvement of Local Revenue. The more number of GRDP will effect to increasing the Total of Local Revenue. Because GRDP is an indicator of economic growth. And on the side of Population showed less effective in improving the Local Revenue, because the more number of working people is not necessarily effect to increase the Local Revenue.

2. In Indra Rindu Datu K. research on 2012 entitled Analisis Faktor yang Mempengaruhi Pendapatan Asli Daerah (PAD) di Makassar tahun 1999-2009 by using multiple regression analysis method 2 SLS, explained that the realization of the development of the Local Revenue in Makassar continue to increase. From the empirical results that show that government spending was positive and significant impact towards Local Revenue, as well as the GRDP of Makassar was positive and significant impact towards Local Revenue. This is because the balance that occurs in government spending to improve infrastructure and infrastructure that support an increase in the Local Revenue.

3. Eni Aryanti and Iin Indarti do research entitled Pengaruh Variable Makro terhadap Pendapatan Asli Daerah periode 2000-2009 di Kota Semarang. The method used in this research is Multiple Linear Regression Analysis, with the result that the Macro variables used in the form of the GRDP and inflation shows that the GRDP variable was positive influence towards Local Revenue in Semarang and variable inflation does not affect the Local Revenue Semarang because the inflation rate is required in

consideration of amendments such as tariffs by setting the tax rates and levies that are flat, although the tax rate and levy are set high or low it is not striving towards acceptance of the original income Semarang. Because the rate of inflation just as useful as consideration rates change. This condition causes the inflation variable that should negatively affect to the acceptance of the Local Revenue, became influential in the city of Semarang.

4. Arief Eka Atmaja in his research on 2011 conducted a study entitled

Analisis Faktor-Faktor yang Mempengaruhi Pendapatan Asli Daerah (PAD) Di Kota Semarang. The method used was Ordinary Least Square (OLS). From the results of his research explained that the variables used is Regional Spending, population and the GRDP summed together these variables affect the Local Revenue. Individually, the variables such Regional Spending , Total Population and the GRDP may influence Local Revenue, which has the greatest influence on Local Revenue in Semarang is Total Population. This is evidenced by the highest regression coefficient 5,742.

5. Diyah Kusrini in 2015 conducted a study entitled Analisis Pengaruh Belanja Langsung, Produk Domestik Regional Bruto dan Jumlah Penduduk Terhadap Pendapatan Asli Daerah (Studi Kasus Sekabupaten/Kota di Provinsi Sumatera Selatan tahun 2010-2014). The model used in this study is the Panel Data Regression. The results of this

29

significant and positive effect towards Local Revenue. This indicates that the respective district/city in South Sumatra took a positive policy in the development potential and attractiveness of the area by doing physical development. Gross Regional Domestic Product Also has a positive and significant effect to the Local Revenue. This happens because the movement of GRDP is dominated by primary and tertiary sectors. While, North Sumatera Province is rich in Natural Resource.

Table 2.1 Previous Studies

No Author Variables Method Results

1 Tobing, 2015

Local Revenue (Y) Total Population (X1)

Gov Expenditure (X2)

GRDP (X3)

Panel Data with Multiple Linear Regression Analysis

Total Population is not significant to Local Revenue

Government Expenditure is positive and significant to Local Revenue GRDP is positive and significant to Local Revenue

2 Datu K, 2012

Local Revenue (Y) Gov Expenditure (X1)

GRDP (X2)

Analysis Regression Model with 2 SLS

Gov Expenditure was significant and positive effect to Local Revenue followed by GRDP and its effect positive and significant directly towards Local Revenue While, GRDP also was effect significant and positive towards Local Revenue.

3 Aryanti and Indarti, tt

Local Revenue (Y) GRDP (X1)

Inflation (X2)

Analisis Regresi Linear Berganda

GRDP was effected the increasing of Local Revenue positively.

Inflation was not effect to the increasing of Local Revenue. 4 Atmaja,

2011

Local Revenue (Y) Local Expenditure (X1)

Total Population (X2)

GRDP (X3)

Ordinary Least Square (OLS)

For all variables were effected towards Local Revenue.

As individually, Total Population was having a great effect to Local Revenue. 5 Kusrini,

2015

Local Revenue (Y) GRDP (X1)

Direct Expenditure of Local Government (X2)

Total Population (X3)

Panel Data Model GRDP has effect significantly to the increasing Local Revenue.

The growth value of Direct

Expenditure of Local Government was affected significantly.

Total Population was not affecting to Local Revenue.

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C. Framework

The Tests associated with the development of macro variables, such Total Population, Government Spending and Gross Regional Domestic Product (GRDP) that have a functional relationship with the Local Revenue (PAD). In this study, the framework of reasoning as follows:

FIGURE 2.1

Scheme of Framework

D. Hypothesis

The hypothesis to be tested on the macro variables in this study are:

1. Presumablythe positive influencebetween Total Populationtowards Local Revenue (PAD).

2. Presumably the positive influence between Government Spending towards Local Revenue (PAD).

3. Presumably the positive influence between Gross Regional Domestic Product (GRDP) towards Local Revenue (PAD).

Total Population

Gross Regional Domestic Product (GRDP)

Local Revenue (PAD)

(+)

(+)

(+)

A. Object / Subject of Research

This study is aimed at districts / cities in Riau Province. Pekanbaru municipal elections as the study area due to facilitate the collection of data, in addition Pekanbaru is the capital of Riau province.

B. Types and Sources of Data

The data used in this study are primary and secondary quantitative method which is the time series data from 2010-2014. About the Local Revenue (PAD), Total Population, Government Spending and Gross Regional Domestic Product (GRDP) is obtained from the Office of the Department of Revenue, the Central Statistics Agency (BPS) Riau, literature-literature / books and reports related to this writing.

C. Data Collecting Technique

Data collecting was done in this study by way author proposes permit research to agencies associated with this author in a study area, after being given permission research and obtain the data required, and then the data will be processed and used as materials analysis to prove the hypothesis that has been put forward.

33

D. The Variables Operational Definition of Research

In this study consisted of the dependent variable [Y] is Local Revenue (PAD) of Riau Province, Independent Variables [X1] is Total Population, [X2]

Government Spending, and [X3] Gross Regional Domestic Product (GRDP) of

Riau Province.

Local Revenue (PAD) is a source of local revenue derived from the results of local taxes, levies result, the results of companies belonging to the region and other areas of wealth management results were separated and others Local Revenue (PAD) legitimate in Riau Province. Unit in thousand rupiah, data is taken from the Central Bureau of Statistics Riau Province 2010-2014.

Total Population is the number of people living in the province of Riau. Data is taken from the Central Statistics Agency of Riau Province 2010-2014.

Government Spending is the expenditure including the government sector and purchases of goods and services used for the payment of subsidies which implements the functions of government. Government expenditure data is taken from the Central Statistics Agency of Riau Province 2010-2014.

Gross Regional Domestic Product (GRDP) is the total value of production of goods and services produced in the region (regional) within a certain specified time (one year) in the province of Riau. Data is taken from the Central Statistics Agency of Riau Province 2010-2014.

E. Analysis Method

Data analysis technique used quantitative approach which quantitatively explains the object of study is based on facts and data. Then, analyze descriptively to answer the problem of research. This approach is expected to explain the condition of the object under study to look at the Total Population, Government Spending in the form of direct and indirect spending and Gross Regional Domestic Product at constant prices of the Local Revenue in districts/cities in Riau Province.

This study uses panel data. Panel data regression is used to answer the purpose of this study is to determine whether the number of Total Populations, Government Spending and Gross Regional Domestic Product affect Local Revenue in districts/cities in Riau Province. Panel data is a combination of time series data (time series) and data cross (cross section). There are several advantages of using panel data in economic research. According to Gujarati (2010) in (Tobing, 2015), the advantage of using panel data is as follows:

1. Data Panel is able to accommodate the level of heterogeneity of the variables that are not included in the model.

2. Data Panel able to indicated and measured the effect is the same and cannot be obtained with a simple cross section pure or pure time series. 3. Data Panel was able to reduce co linearity between variables.

4. Data Panel can test and build more complex behavioral models.

35

The data used in this panel data is a combination of cross section data and time series. Time series data used are annual data for 5 years from 2010 to 2014, and the cross section consists of 12 districts/cities in Riau Province which consists of Kuantan Singingi, Indragiri Hulu, Indragiri Hilir, Pelalawan, Siak, Kampar, Rokan Hulu, Rokan Hilir, Meranti Islands, Pekanbaru, Dumai.

Panel Regression models are as follows:

Y= α + b1 X1 + b2 X2 + b3 X3 + e Where:

Y= Dependent Variable (LDR)

α = Constants

X1= 1st Independent Variable X2= 2nd Independent Variable X3= 3rd Independent Variable

b{1,2,3} = Regression Coefficient of each Independent Variable e = Error term

In the regression model estimation method using panel data can be performed through three approaches:

a. Common Effect Models

Panel data model approach is the simplest because only combines the data time series and cross section. In this model neglected dimension of time as well as individuals, so it is assumed that the behavior of corporate data together in different periods. This method can use the approach Ordinary Least Square (OLS) or a least squares technique for estimating panel data model.

The regression equations in the model Common Effect can be written as follows:

Y

it

= α + X

it

β + ε

it Where:

i = Kuantan Singingi, Indragiri Hulu,…. Dumai t = 2010, 2011, 2012, 2013, 20214

Where i indicate the cross section (people) and t is the time period. Assuming the error component in the processing of ordinary least squares, estimation process separately for each unit cross section can be done.

b. Fixed Effect Models

This model estimates that the differences between individuals can be accommodated on the difference intercept. To estimate the Fixed Effects panel data models using the technique of dummy variables to capture the difference between the company's intercept, the intercept differences can occur due to differences in the work culture, managerial, and incentives. Nevertheless, it slopes equally between the companies. The estimation model is often called the Least Squares Dummy Variable technique (LSDV).

In the Fixed Effects models, each individual is an unknown parameter and estimated by using dummy variables as follows:

Yit= α + iα + X’itβ + εit

[ ] = [ ] + [

][ ] + [

] [ ] + [ ]

These techniques are called Least Square Dummy Variable (LSDV). In addition to in addition be applied to each individual effect, LSDV can also

37

accommodate a systemic effect. This can be done through the addition of a dummy variable in the model.

c. Random Effect Model

This model will estimate the panel data where possible disturbance variables are interconnected across time and between individuals. In the Random Effects Model intercept differences are accommodated by the error terms of each company. The advantages of using a model are remove heteroscedasticity of Random Effect. This model is also called the Random Error Component Model (ECM) or technique Generalized Least Square (GLS).

Random Effects Model equation can be written as follows:

Y

it

= α + X’

it

β +

w

it i = Kuantan Singingi, Indragiri Hulu,…. Dumai

t = 2010, 2011, 2012, 2013, 2014 Where:

wit =

ε

it + u1; E(wit) = 0; E(wit2) = α2+ αu2;

E(wit’ wjt-1) = 0;1 ≠ j; E(ui’

ε

it) = 0; E(εi’εis)= E(εit’εjt)= E(εit’εjs)= 0.

Although, the error components of wt are homoscedastic, in fact, there is a correlation between the wt and wit-s (equicorrelation), namely:

Corr(w

it’

wi(t-1)

) = α

u

2

_{/ (α}

2

_{+ α}

u

2

)

Therefore, the OLS method cannot be used to obtain an efficient estimator for random effects models. An appropriate method for estimating the random

effects models is the Generalized Least Squares (GLS) assuming homocedastic and no cross sectional correlation.

F. Selection of Model

For the selection of the right model to manage the data panel, can be tested as follows:

1. Chow Test

Chow test is a test to determine the model Fixed Effect or Random Effect most appropriately used in estimating panel data.

2. Hausman Test

Hausman test is a statistical test to select whether the model Fixed Effect or Random Effect most appropriately used.

3. Lagrange Multiplier Test

To determine whether Random Effect Model is better than Common Effect Method (OLS), test was used Lagrange Multiplier (LM).

After obtaining the right model, the regression results of the model is to prove the hypothesis the presence or absence of significant influence then tested the significance of the t test and F test. Inthe test specification models in the study, the authors used several methods:

a. Chow Test

Chow Test is a test to determine the model Fixed Effect or Random Effect most appropriately used in estimating panel data. The hypothesis of the Chow

39

H0: Common Effect Model or pooled OLS H1: Fixed Effect Model

Basic rejection of the above hypothesis is by comparing the calculation of the F-statistic with F-table. Comparison is used if the results of the F count is greater (>) of F table then H0 rejected, which means the most appropriate model used is the Fixed Effects Model. Vice versa, if F count is smaller (<) of F table then H0 is accepted and the model used is Common Effect Model (Widarjono in Basuki and Yuliadi, 2015).

Calculation of F statistics obtained in Chow Test formula (Baltagi in Basuki and Yuliadi, 2015):

Where:

SSE1: Sum Square Error from Common Effect Model

SSE2: Sum Square Error from model Fixed Effect

n : Number of Companies (Cross Section)

nt : Number of cross section x Number of time series k : Number of Independent Variables

While F table obtained from

Where:

α: The Significance level used (Alfa) n: Number of Companies (cross section)

nt: Number of cross section x Number of time series k: Number of Independent Variables

b. Hausman Test

After completing the Chow test and obtained the right model is Fixed Effect, then the next we will examine which model among models Fixed Effect or Random Effect most a

ppropriate, this test is referred to as Hausman test.

Hausman test can be defined as statistical tests to select whether the model Fixed Effect or Random Effect most appropriately used. Tests conducted by the Hausman test the following hypotheses:

H0: Random Effect Model H1: Fixed Effect Model

Hausman Test will follow the distribution of Chi-squares as follows:

m =

̂ ̂ ̂

Hausman test statistic follows the Chi Square statistic distribution with a

degree of freedom as much as k, where k is the number of independent variables. If the value of the Hausman statistic is greater than the critical value, H0 is rejected and the right model is a model Fixed Effect while conversely if Hausman statistic value is smaller than the critical value, the

41

If the Hausman test showed no significant difference (p> 0.05), it reflects that the random effects estimator is not free safe free of bias, and therefore more advisable to estimate fixed effect rather than an effect estimator remains.

c. Lagrange Multiplier Test

Lagrange Multiplier (LM) is a test to determine if the Random Effect Model or Common Effect Model (OLS) is most appropriately used. Random Effect significance test was developed by Breusch Pagan. Breusch Pagan method for Random Effect significance test is based on the residual value of the OLS method.

The value of LM statistics is calculated based on the following formula:

LM =

[

̂ ̂

]

Where:

n = Number of Individuals T = Number of Time Periods

e = residual method of Common Effect (OLS)

Hypothesis is:

H0: Common Effect Model H1: Random Effect Model

LM test is based on the distribution of Chi-Squares with a degree of freedom for the number of independent variables. If the value of LM statistic is greater than the critical value of chi-squares then we reject the null hypothesis, which means precise estimation for panel data regression model is

a method of Random Effect on Effect Common methods. Conversely, if the value of the LM statistic is less than the value of chi-squares as critical value, then we accept the null hypothesis, which means that the estimates used in panel data regression method is not a method Common Effect Random Effect (Widarjono, 2013).

G. Quality Test Data

By using Ordinary Least Square method (OLS), to produce the value of the model parameter estimators are more precise, it is necessary to detect whether the model deviates from the classic assumption or not, the detection consists of:

1. Multicollinearity Test

Multicollinearity can be defined as a situation where one or more independent variables collinear expressed as a combination of other variables. This test aims to determine whether the regression found a correlation between the independent variables. If there is a correlation, then it called the problem of multicollinearity. One way to detect the multicollinearity is:

a. R2 is quite high (0.7 to 0.1), but the t-test for each regression coefficient is not significant.

b. High-R2 is Low sufficient condition (sufficient) but not a necessary condition (Necessary) for the occurrence of multicollinearity, because in R2 is low (<0.5) can also occur multikolinearity.

43

1) If F* > F table, means H0 is rejected, so then, there is

multicollinearity

2) If F* < F table, means H0 is accepted, so then, there is no

multikolinearity

One characteristic symptom of multicollinearity is the model has a high coefficient of determination (R2) say above 0.8 but few significant independent variables affect the dependent variable through the t test. However, based on the F test are statistically significant, which means all the independent variables jointly affect dependent variable (Widarjono, 2013).

To resolve the problem, multicollinearity, the independent variables were correlated with other independent variables should be removed. In the case of GLS method, this model has been anticipated from multikolinearity.

2. Heteroscedasticity Test

A regression model is said to be exposed in the event of inequality heteroscedasticity residual variance from one observation to another observation. If the variance of the residuals and the observations of the other observations remained, then it called homoscedasticity. If the variance is different, it is called heteroscedasticity.

Heteroscedasticity can occur if there is some data loner (outliers) in the model.

One of the test statistics that can be used to test whether the variance of the error is homoscedasticity or not is to test the Park to assume that σ is a

function of the explanatory variables X. The equation used to indicate the relationship is:

σ

=

σ

X

e

Vi

or ln

σ

=

ln

σ

+ βXi + Vi

Because

σ

is unknown, so it is estimated with

e

, then the model becomes

ln

e

= α + βXi + Vi

If β significantly, it means there is heteroscedasticity. So, there are two stages in the Park test, namely:

a. Regressing Y to X by the least squares method, as well as get

e

i

with

e

.

b. Regressing

e

to X using the model ln

e

= α + βXi + Vi (Setiawan

dan Kusrini, 2010).

This test aims to test whether the regression model was occurred inequality variance of residuals from one observation to another observation. If the variance of the residuals of an observation to observation of others still, it is called heteroscedasticity. A good regression model is the absence of heteroscedasticity. In the case of GLS method, this model has been anticipated from heterocedasticity. Detection of heteroscedasticity:

1) If there is a particular pattern, such as dots form a pattern that is specific manageable units (corrugated, widened and then narrowed), there have been heteroscedasticity.

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2) If there is no clear pattern, as well as the points spread above and below the number 0 on the Y axis, it does not happen Heteroscedasticity.

H. Statistical Analysis Regression Test

Significance test is a procedure used to examine errors or correctness of the results of the null hypothesis of the sample.

1. Coefficient of Determination Test (R-Square)

In essence, the coefficient of determination R2 measures how far the ability of the model is to explain variations in the independent variables to measure the goodness of a model (goodness of fit). That is how the regression of established value according to the data. If all data is placed on the regression line or in other words all the residual value is zero then we have the perfect regression line. And this is very rarely the case. Generally what happens is êi can be positive or negative. If this is the case, means regression line is not one hundred percent perfect. However, the hope is to get the regression line that led to EI as small as possible. The determination coefficient values between 0 and 1 (0 < R2 < 1), the value (R2) is small means the ability of the independent variables in explaining the variation of variables is very limited. A value close to 1 means that the independent variable provide almost all the information needed to predict the variation dependent models (Gujarati in Awanis,2015).

The use of R Square (R squared) often cause problems, namely that its value will always increase with the addition of independent variables in a model. This will lead to bias, because if you want to obtain a model with high

R, a researcher can arbitrarily adding independent variable and the value of R will increase, regardless of whether the additional independent variables associated with the dependent variable or not. Because of the weaknesses in the calculation of R2, many researchers are advised to use the Adjusted R Square. Interpretation is the same as R Square, but the value of Adjusted R Square can rise or fall with the addition of a new variable, depending on the correlation between the additional independent variables with the dependent variable. Adjusted R Square value may be negative, so if the value is negative, then the value is considered to be 0, or not at all independent variables able to explain the variance of the dependent variable (Muttaqin dkk,2014).

2. F-Statistics Test

F-statistic test is done to see how much influence the independent variable as a whole or together on the dependent variable. The steps are performed in this test as follows:

a. Formulating the Hypothesis

H0: β1= β2= β3 = β4 = 0, meaning that together there is no influence of

independent variables on the dependent variable.

Ha: β1 = β2 = β3 = β4 ≠ 0, meaning that together the influence of

independent variables on the dependent variable. b. Decision-Making

Decision-making in the F test is done by comparing the probability of simultaneous effect of independent variables between the independent

Spending as well as possible in order to improve the facilities and services for the communities. So it is easy for people to pay taxes and levies to local authorities (Local Government).

So that the results of this second analysis, which considered that the existence of positive and significant influence of the Government Spending on Local Revenue can be answered and proved in this section with their positive and significant effect of Government Spending on Local Revenue.

3. The influence of Gross Regional Domestic Product towards Local Revenue From the results above, the Gross Regional Domestic Product (GRDP) showed a positive and statistically significant for all districts/cities in Riau Province. The GRDP has a positive coefficient and significant correlation between GRDP and Local Revenue. The Coefficient of GRDP is 0.387503, which if there is an increase in the value of GRDP on 1% while other variables are constant, then the changes in dependent variable (Local Revenue) was increased on 0.387503%. The positive correlation that occurred between GRDP and Local Revenue, explained when independent variables are increasing/decreasing, then variable dependent is following to the same direction, increasing or decreasing.

If we see from previous research, that conducted by Indra Rindu Datu K (2012), which use GRDP as independent variable, has positively effect and significant correlation between GRDP and Local Revenue in Makassar.

So based on the analysis above, the assumption for the third hypothesis, it is assumed that there is a significant and positive impact from Gross Regional Domestic Product towards Local Revenue.

CONCLUSION AND SUGGESTION A. Conclusions

Based on analysis results and discussion, it can be drawn several conclusions from this study are:

1. Total Population

From the above results using the Fixed Effect Model, revealed that the Total Population does not affect the Local Revenue. These results are not consistent with the hypothesis put forward in the study. Due to the quality and productivity is less than the people of Riau, as well as its high level of consumption of Riau.

With assumption, the lack of quality of the population due to the quality of education is still far compared with education in Java. And most people work as farmers. And in this study, a population with a probability value on -0.601143 not effect to Local Revenue in the districts/cities in Riau Province on period 2010-2014.

2. Government Spending

In this study, Government Spending with a probability value on 1.824001 is positive and significant impact to Local Revenue in the districts/cities in Riau Province on period 2010-2014. These results are consistent with the hypothesis proposed in this study.

With assumption, that local government has taken the right decision in developing the potential of the region and promoting the development of facilities and infrastructures which required by people in carrying out the daily activities. 3. Gross Regional Domestic Product (GRDP)

In this study, GRDP variable with a probability value on 0.387503 also have a positive influence and significant impact to Local Revenue in the districts/cities in

Riau Province on period 2010-2014. These results are also consistent with the hypothesis proposed in this study.

With assumption, that the distribution of taxes and levies is a big potential. Especially taxes derived from the processing industry and forestry. As well as natural factors that cannot be predicted or could not be included in economic assumption.

B. Suggestions

After interpreting on this study with some conclusions, the author give some suggestions relating to this research that can be used as input and consideration for the parties concerned and further research.

1. Barriers are derived from the low quality of the people and his lack of education on the importance of entrepreneurship. So in this study are expected that Local governments must take a lead in the introduction and education about the economic business for community with the support of infrastructure and facilities required, and provide assistance to Small and medium Enterprise (UKM) in the development and improvement of productivity. So, the people are more interested in being seller than buyer.

2. The government should be able to balance the needs of the government priority that will be implemented by way of the realization of the construction on infrastructure and facilities that can benefit the public. As well as the transparency related of Government Spending from the government to avoid misunderstandings between government and public.

3. In a way, the government has to analyze the various sectors that should be in particular concern. So that, government can implement policies in these

sectors, with the intention of these sectors can give more influence to increase Local Revenue in subsequent years. Beside to increase the value of GRDP, Government has to provide the society with any facilities and infrastructures in accordance with their needs in improving the regional potential. Especially from areas that dominated in primary sector, which there are so many investor for that sector, with an agreement for appropriate and fair sharing between local communities and investors.

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