THE INFLUENCE OF LOCAL GOVERNMENT FINANCIAL PERFORMANCE ON THE HUMAN DEVELOPMENT INDEX WITH PUBLIC SECTOR EXPENDITURE ALLOCATION AS AN INTERVENING VARIABLE IN EAST OGAN KOMERING ULU REGENCY

Abstract

This study investigates the effect of local government financial performance on the Human Development Index (HDI), with public sector expenditure allocation serving as an intervening variable in East Ogan Komering Ulu Regency. The study was motivated by the existing gap between regional fiscal capacity and human development outcomes, as well as the need to clarify the mechanism through which financial management contributes to human development. A quantitative research approach was employed using secondary data obtained from audited regional budget reports and official HDI data covering the 2016–2025 period. The data were analyzed using Structural Equation Modeling–Partial Least Squares (SEM-PLS) with SmartPLS to examine both direct and indirect relationships among the research variables. The findings indicate that local government financial performance does not have a significant direct effect on HDI, as evidenced by a path coefficient of -0.079, a T-statistic of 0.252, and a P-value of 0.801. However, financial performance has a positive and significant effect on public sector expenditure allocation, with a path coefficient of 0.802, a T-statistic of 5.652, and a P-value of 0.000. Public sector expenditure allocation also demonstrates a positive and significant effect on HDI, with a path coefficient of 0.957, a T-statistic of 3.093, and a P-value of 0.002. Furthermore, the indirect effect of financial performance on HDI through public sector expenditure allocation is positive and significant, with a coefficient of 0.677, a T-statistic of 2.232, and a P-value of 0.026. These findings demonstrate that public sector expenditure allocation serves as a full mediating mechanism in the relationship between local government financial performance and human development. Thus, stronger financial performance alone is insufficient to directly improve human development outcomes; its benefits need to be translated into effective and productive public spending, particularly in education, healthcare, infrastructure, and essential public services. The findings emphasize the importance of strengthening the quality of regional budget planning and expenditure allocation to ensure that fiscal capacity contributes more effectively to improving community welfare and sustainable human development.