Beyond Budget Allocation: Understanding Fiscal Trade-Offs and Spending Structure in Decentralized Governments

Abstract

This study aims to examine fiscal trade-offs and spending structures within the context of decentralized local governments. The primary focus is to analyze how expenditure composition and fiscal behavior influence budget allocation decisions, particularly the trade-off between operational spending and capital expenditure. This research employs a quantitative approach with descriptive and explanatory design, utilizing panel data from local government financial reports across regencies and municipalities in Aceh Province over the period 2019–2023. Panel data regression analysis is applied to investigate the relationship between spending structure, fiscal behavior, and budget allocation trade-offs. The findings reveal that local government expenditure structures are predominantly driven by operational spending, especially personnel expenditures, while capital expenditure remains relatively low and shows a declining trend. This condition reflects increasing fiscal trade-offs, where short-term expenditure priorities tend to crowd out long-term investment. Furthermore, fiscal behavior demonstrates high expenditure elasticity relative to revenue, indicating a strong dependence on central government transfers, commonly associated with the flypaper effect. Empirical results confirm that both spending structure and fiscal behavior have a significant impact on budget allocation trade-offs. This study contributes to the literature on public financial management by providing insights into the implications of fiscal decentralization on expenditure quality. Policy implications highlight the need for budget reorientation toward more productive spending and strengthening local fiscal independence to support sustainable regional development