CAUSALITY ANALYSIS OF GOVERNMENT DEBT AND ECONOMIC GROWTH IN INDONESIA, 1990 – 2020

Abstract

This study aims to determine the pattern of the causal relationship between government debt and economic growth in Indonesia in 1990 – 2020. The data used in this study were obtained from the Indonesian State BPS (Central Bureau of Statistics). This research was conducted using the Granger causality test. The results show that in Indonesia there is one direction causality pattern, Economic Growth causes Government Debt, but Government Debt does not cause Economic Growth. The fact that government debt continues to rise, these results indicate that Indonesia's economic growth process is failed to reduce or suppress government debt. On the other hand, an increase in government debt, which also does not encourage economic growth, indicates the possibility of misallocation of the use of government debt to projects or programs that do not or are less effective at spurring economic growth. Considering that Indonesia has never failed to repay principal and interest on its debts, it shows that in the process of its economic growth, Indonesia has experienced what is known as the Fisher's Paradox, namely the more principal installments along with debt interest paid, the greater the amount of debt that must be made. The phenomenon that is often referred to as 'dig a hole cover the hole', borrowing money to pay off debt.