Does the Wagner’s Law exist in a strategic national area? An evidence from Kedungsepur - Indonesia

The Kedungsepur National Strategic Area was formed to realize urban areas as the center of national and international economic activities. In order to realize this goal, government expenditure and economic growth are important variables in the development process. Empirically, the study was conducted to analyze the relationship between government expenditure and economic growth from the perspective of Wagner's Law in 6 regencies or cities in the Kedungsepur National Strategic Area during 2012 to 2017. Methodically, this study used Panel Granger Causality and Panel Data Regression to explain the short-term relationship between both variables. The results showed that there was a negative one-way relationship from economic growth to government expenditure. The increase in economic growth in the previous year would reduce the government expenditure in the short term, resulting the Wegner's Law inapplicable in the Kedungsepur National Strategic Area. This was due to the ineffectiveness of institutions, differences in regional expenditure structures towards state expenditures and the lack of government work programs in the productive sector. Thus, a good and coordinative institutional environment was needed to realize the cooperation in crucial sectors, as well as the distribution of regional expenditures on more productive expenditures based on priority interests, aiming at the welfare of the community.