Government Size, Fiscal Capacity, and Financial Distress in Local Governments: A Systematic Literature Review

Anggia Marshanda Putri (Department Of Accounting, Sriwijaya University, Indonesia)
Yusnaini (Department Of Accounting, Sriwijaya University, Indonesia)
Shelly Febriana Kartasari (Department Of Accounting, Sriwijaya University, Indonesia)

International Journal of Education, Vocational and Social Science
Vol. 5 No. 04 (2026): International Journal of Education, Vocational and Social Science( IJVESS)

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.