The Effect of Government Expenditure and GRDP Per Capita on Income Inequality

Abstract

The high condition of income inequality in Yogyakarta (DIY) among other provinces in Indonesia indicates that based on the Kuznets hypothesis, the increase in per capita income has not been able to overcome inequality. We found a previous study that government expenditure could reduce income inequality. At the same time, Keynesian states that forming national income is government expenditure. Exciting phenomena have directed this study to determine the effect of government expenditure on GRDP per capita and the impact of these variables on income inequality, using district/city level data in the DIY province for 2012-2021 with panel data analysis. The study also analyzes the indirect effect of government expenditure on income inequality through per capita GRDP using the Sobel test. The finding shows that government expenditure and GRDP per capita affect inequality. At the same time, Indirect effect analysis finds that government expenditure affects inequality through per capita income.