Government Size, Fiscal Capacity, and Financial Distress in Local Governments: A Systematic Literature Review
Keywords:
Government Size, Fiscal Capacity, Financial distress, Local Governments, Agency Theory.
Abstract
Decentralization requires local governments to manage resources and finances in a sustainable manner, so that financial distress becomes an important issue when fiscal capacity is not able to meet the needs of government services and obligations. This study aims to analyze the relationship between government size, fiscal capacity, and financial distress in local governments based on the perspective of Agency Theory. The method used is Systematic Literature Review (SLR) with PRISMA guidelines for 30 articles indexed by Scopus and SINTA. The results of the study show that the size of government provides resources while increasing complexity and spending needs, while fiscal capacity determines the government's ability to meet these needs. The imbalance between government size, fiscal capacity, and liabilities can increase the risk of financial distress. From the perspective of Agency Theory, supervision, transparency, and accountability are needed to support the financial sustainability of local governments.
References
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Padovani, E., Porcelli, F., & Zanardi, A. (2024). The determinants of the financial distress of Italian municipalities: How much is it due to inadequate resources? International Tax and Public Finance, 31(6), 1494–1533. https://doi.org/10.1007/s10797-024-09856-7
Pradana, I., & Sarjiyanto, S. (2023). Financial Distress Reviewed from Financial Ratios and Local Government Characteristics. Journal of Business and Management , 3(5), 978–985.
Prihatiningtias, Y. W., & Adiwicaksana, S. (2024). The Role Of Political Connections In Moderating The Effect Of Board Diversity On Financial Distress. Journal of Applied Finance and Accounting, 11(2). https://doi.org/10.21512/jafa.v11i2.12271
Putri, M., Abdullah, S., Adnan, A., & Yusmita, F. (2023). Accrual Manipulation in Local Government Financial Reporting in Indonesia: Does Government Size and Fiscal Capacity Have an Effect? Scientific Journal of Accounting Economics Students, 8(4), 536–544. https://doi.org/10.24815/jimeka.v8i4.24314
Rahmadanni, S. P. N., & Deviani, D. (2024). Democracy, Political Power and Local Government Measures on the Transparency of Provincial Local Government in Indonesia. Journal of the Academy of Accounting, 7(1), 114–128. https://doi.org/10.22219/jaa.v7i1.23647
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Setiawan, A., Tjiptoherijanto, P., Mahi, B. R., & Khoirunurrofik, K. (2022). The Impact of Local Government Capacity on Public Service Delivery: Lessons Learned from Decentralized Indonesia. Economies, 10(12), 323. https://doi.org/10.3390/economies
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Sopianti, Y., & Munandar, A. (2026). The Effect of Local Government Size, Fiscal Independence, Risk Management, and Internal Control Maturity on Audit Delay. Fundamental and Applied Management Journal, 4(2), 842–855. https://doi.org/10.66314/famj.v4i2.1047
Udayana, K. A., Hidayat, A. S., & Yuniati, S. A. (2022). The Relevance of the Optimum Scale of Government Expenditure to Economic Growth and Financial Distress of Regencies/Cities in Maluku Province. Journal of Treasury Management, 3(1), 71–89. https://doi.org/10.33105/jmp.v3i1.426
Uttunggadewi, S. K. M., Martini, R., & Aryani, Y. A. (2024). Factors influencing accrual manipulation: A study in South Sumatra Regencies/Cities. Ecobis: Journal of Management and Accounting Sciences, 12(2), 191–205. https://doi.org/
10.36596/ekobis.v12i2.1689
Afifah, S. I., & Adnan, A. (2022). The Effect of Budget Variances, Local Government Size, and Fiscal Capacity on the Financial Performance of Local Governments. Scientific Journal of Accounting Economics Students, 7(3), 485–498. https://doi.org/10.24815/j
imeka.v7i3.21670
Andrianda, Y., Yulina, B., & Yanto, D. (2025). Determinants of Financial Distress in Regencies and Cities on the Island of Sumatra. Journal of Accounting and Business, 5(2), 548–559. https://doi.org/10.51903/t6n6hw47
David, A., Yigitcanlar, T., Li, R. Y. M., Corchado, J. M., Cheong, P. H., Mossberger, K., & Mehmood, R. (2023). Understanding Local Government Digital Technology Adoption Strategies: A PRISMA Review. Sustainability, 15(12), 9645. https://doi.org/10.3390/su15129645
Eisenack, K. (2024). Why Local Governments Set Climate Targets: Effects of City Size and Political Costs. Environmental and Resource Economics, 87(11), 2935–2965. https://doi.org/10.1007/s10640-024-00919-1
Elfiyana, E., & Arza, F. I. (2022). The Influence of Local Government Characteristics and Financial Factors on Financial Distress Conditions in Indonesia. JOURNAL OF ACCOUNTING EXPLORATION, 4(2), 425–437. https://doi.org/10.24036/jea.v4i2.500
Fachrunnisa, Z. H., Azizah, I. N., & Pramudiati, N. (2024). Does good corporate governance predict financial distress? Journal of the Academy of Accounting, 7(4), 553–568. https://doi.org/10.22219/jaa.v7i4.36049
Iacuzzi, S. (2022). An appraisal of financial indicators for local government: a structured literature review. Journal of Public Budgeting, Accounting & Financial Management, 34(6), 69–94. https://doi.org/10.1108/JPBAFM-04-2021-0064
Jalante, H. (2026). The Formation of Greater Luwu Province and the Future of South Sulawesi: Empirical Analysis, Fiscal Capacity, and Contemporary Socio-Spatial Perspectives. Journal of Pallangga Praja (JPP), 8(1), 79–91. https://doi.org/10.61076/jpp.v8i1.6318
Jin, P., & Wang, Z. (2025). Digital budget supervision governance and local government fiscal transparency. International Review of Economics & Finance, 102, 104306. https://doi.org/10.1016/j.iref.2025.104306
Kalbuana, N., Taqi, M., Uzliawati, L., & Ramdhani, D. (2022). The Effect of Profitability, Board Size, Woman on Boards, and Political Connection on Financial Distress Conditions. Cogent Business & Management, 9(1).
https://doi.org/10.1080/23311975.2022.2142997
Kalbuana, N., Taqi, M., Uzliawati, L., & Ramdhani, D. (2023). CEO narcissism, corporate governance, financial distress, and company size on corporate tax avoidance. Cogent Business & Management, 10(1). https://doi.org/10.1080/23311975.2023.2167550
Marriage, S. (2023). What are the effects of financial stress on economic activity and government debt? An empirical examination in an emerging economy. Borsa Istanbul Review, 23(1), 254–267. https://doi.org/10.1016/j.bir.2022.10.007
Kojongkam, G. A., Rahim, S., & Dunggio, I. (2022). The Effect of Regional Fiscal Capacity on Climates Change Action Budgeting Commitments. Gorontalo Development Review, 5(1), 26. https://doi.org/10.32662/golder.v5i1.1996
Kustati, K., & Rahayu, S. (2025). The Influence of Budgetary Solvency Ratio and Local Government Size on the Financial Performance of Local Governments with Financial Distress as a Mediating Variable. Asian Journal of Management, Entrepreneurship and Social Science, 5(2), 365-388.
Li, E., Chen, Q., Zhang, X., & Zhang, C. (2023). Digital Government Development, Local Governments' Attention Distribution and Enterprise Total Factor Productivity: Evidence from China. Sustainability, 15(3), 2472. https://doi.org/10.3390/su15032472
Nasirwan, N., Ginting, A. B., Manalu, C., & Sinaga, D. A. (2024). The Influence of Local Government Size and Economic Growth on Local Government Financial Performance. Economic: Journal of Economic and Business, 3(3), 165–171. https://doi.org/10.56495/ejeb.v3i3.698
Ningrum, D. T., & Sholihah, R. A. (2023). The Influence Of Financial Factors And Local Government Characteristics On Financial Distress. Research, 5(1), 098–112. https://doi.org/10.37641/riset.v5i1.226
Novalia, S., & Deviani, D. (2023). The Influence of Democracy, Political Power and Regional Government Measures on Regional Government Financial Transparency. JOURNAL OF ACCOUNTING EXPLORATION, 5(1), 127–140. https://doi.org/10.24036/jea.v5i1.636
Padovani, E., Porcelli, F., & Zanardi, A. (2024). The determinants of the financial distress of Italian municipalities: How much is it due to inadequate resources? International Tax and Public Finance, 31(6), 1494–1533. https://doi.org/10.1007/s10797-024-09856-7
Pradana, I., & Sarjiyanto, S. (2023). Financial Distress Reviewed from Financial Ratios and Local Government Characteristics. Journal of Business and Management , 3(5), 978–985.
Prihatiningtias, Y. W., & Adiwicaksana, S. (2024). The Role Of Political Connections In Moderating The Effect Of Board Diversity On Financial Distress. Journal of Applied Finance and Accounting, 11(2). https://doi.org/10.21512/jafa.v11i2.12271
Putri, M., Abdullah, S., Adnan, A., & Yusmita, F. (2023). Accrual Manipulation in Local Government Financial Reporting in Indonesia: Does Government Size and Fiscal Capacity Have an Effect? Scientific Journal of Accounting Economics Students, 8(4), 536–544. https://doi.org/10.24815/jimeka.v8i4.24314
Rahmadanni, S. P. N., & Deviani, D. (2024). Democracy, Political Power and Local Government Measures on the Transparency of Provincial Local Government in Indonesia. Journal of the Academy of Accounting, 7(1), 114–128. https://doi.org/10.22219/jaa.v7i1.23647
Sari, D. N., Purwidianti, W., Tubastuvi, N., & Santoso, S. B. (2025). Determinants of financial distress: analysis of financial ratio, market, and macroeconomic factors. Journal of the Academy of Accounting, 8(3). https://doi.org/10.22219/jaa.v8i3.39780
Setiawan, A., Tjiptoherijanto, P., Mahi, B. R., & Khoirunurrofik, K. (2022). The Impact of Local Government Capacity on Public Service Delivery: Lessons Learned from Decentralized Indonesia. Economies, 10(12), 323. https://doi.org/10.3390/economies
10120323
Setyawan, R., Raharjo, B., & Dewayani, J. (2024). Governance in the Digital Era: Analyzing the Adoption of E-Government Services in Local Authorities Through Quantitative Methods. Journal of Management and Informatics, 3(3), 434–450. https://doi.org/10.5
1903/jmi.v3i3.54
Sopianti, Y., & Munandar, A. (2026). The Effect of Local Government Size, Fiscal Independence, Risk Management, and Internal Control Maturity on Audit Delay. Fundamental and Applied Management Journal, 4(2), 842–855. https://doi.org/10.66314/famj.v4i2.1047
Udayana, K. A., Hidayat, A. S., & Yuniati, S. A. (2022). The Relevance of the Optimum Scale of Government Expenditure to Economic Growth and Financial Distress of Regencies/Cities in Maluku Province. Journal of Treasury Management, 3(1), 71–89. https://doi.org/10.33105/jmp.v3i1.426
Uttunggadewi, S. K. M., Martini, R., & Aryani, Y. A. (2024). Factors influencing accrual manipulation: A study in South Sumatra Regencies/Cities. Ecobis: Journal of Management and Accounting Sciences, 12(2), 191–205. https://doi.org/
10.36596/ekobis.v12i2.1689
Published
2026-09-11
How to Cite
Putri, A. M., Yusnaini, & Kartasari, S. F. (2026). Government Size, Fiscal Capacity, and Financial Distress in Local Governments: A Systematic Literature Review. International Journal of Education, Vocational and Social Science , 5(04), 622-637. https://doi.org/10.63922/ijevss.v5i04.6504
Contact Person +6282139474255
Email : ijevss@citakonsultindo.or.id / editor.ijevss@gmail.com
