BUDGET VARIANCES, FISCAL CAPACITY, AND FINANCIAL PERFORMANCE IN SOUTH SUMATRA LOCAL GOVERNMENTS

This study aimed to examine the effects of revenue budget variance, expenditure budget variance, fiscal capacity, and local government size on the financial performance of local governments in South Sumatra Province during the 2020–2024 period. The study employed a quantitative approach with an associative-causal design. The population consisted of 18 local governments in South Sumatra Province, and a saturated sampling technique was applied, resulting in 90 panel observations over five years. Secondary data were collected from Budget Realization Reports and Local Government Financial Statements. Financial performance was measured using the regional financial efficiency ratio, while the independent variables consisted of revenue budget variance, expenditure budget variance, fiscal capacity, and local government size. The data were analyzed using panel data regression with the Fixed Effect Model. The results showed that revenue budget variance had a significant negative effect on financial performance, with a regression coefficient of −1.476 and a significance value of 0.001. Expenditure budget variance had a significant positive effect, with a regression coefficient of 1.855 and a significance value of 0.001. Fiscal capacity had no significant effect, with a significance value of 0.520. Local government size had a significant positive effect, with a regression coefficient of 0.440 and a significance value of 0.000. The adjusted coefficient of determination indicated that 31.31 percent of the variation in financial performance was explained by the model, while the F-test confirmed that all independent variables simultaneously affected financial performance with a significance value of 0.000. These findings implied that strengthening budget planning, expenditure control, and resource management may support more efficient and accountable financial management in local governments.