Central Transfer Dependence, Economic Growth, And Own-Source Revenue Growth in The Regencies and Cities of North Sumatra

Abstract

This study examines whether dependence on central transfers and economic growth in the previous year are associated with the growth of own-source revenue (pendapatan asli daerah, PAD) in the regencies and cities of North Sumatra, Indonesia. Using a balanced panel of 33 regions for 2022 to 2025 (132 observations), the study estimates two-way fixed-effects models with standard errors clustered by region and reports a series of sensitivity checks. Transfer dependence is positively associated with revenue growth in every specification, with coefficients between 3.1 and 5.2. The baseline estimate narrowly misses significance at the 5 percent level (p = 0.053) and becomes significant when one extreme observation is excluded or winsorized (p = 0.007 to 0.012). Lagged economic growth shows no robust association once year effects are included. The results do not support the argument that transfer dependence suppresses local revenue growth, which suggests that policy attention should shift from the volume of transfers toward collection capacity and the implementation of tax reform. The study contributes by analyzing the growth, rather than the level, of own-source revenue with lagged regressors and by documenting how sensitive the estimates are to an influential observation. The analysis is exploratory, and the estimates describe conditional associations rather than causal effects