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Vertical fiscal imbalance, transfer payments, and fiscal sustainability of local governments in China

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  • Li, Tianyu
  • Du, Tongwei

Abstract

This paper measures fiscal sustainability of local governments in China and analyzes the effects of vertical fiscal imbalance and transfer payments on fiscal sustainability under the framework of Chinese-style fiscal decentralization. We find that the current fiscal behaviors of local governments in China are unsustainable, but most local governments have sufficient space to establish a positive fiscal feedback mechanism through fiscal adjustment to achieve fiscal sustainability in spite of the existence of “fiscal fatigue”. Moreover, the effect of transfers from central government on fiscal sustainability depends on the degree of vertical fiscal imbalance. More specifically, the transfers have a negative impact when the vertical imbalance is low, and have a positive impact when it’s high. Finally, these results are robust to alternative model specifications and endogeneity issues.

Suggested Citation

  • Li, Tianyu & Du, Tongwei, 2021. "Vertical fiscal imbalance, transfer payments, and fiscal sustainability of local governments in China," International Review of Economics & Finance, Elsevier, vol. 74(C), pages 392-404.
    • Handle: RePEc:eee:reveco:v:74:y:2021:i:c:p:392-404
    DOI: 10.1016/j.iref.2021.03.019
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    2. Jiang, Wei & Li, Xitao & Liu, Ruoxi & Song, Yijia, 2022. "Local fiscal pressure, policy distortion and energy efficiency: Micro-evidence from a quasi-natural experiment in China," Energy, Elsevier, vol. 254(PB).
    3. Lin, Boqiang & Zhou, Yicheng, 2021. "How does vertical fiscal imbalance affect the upgrading of industrial structure? Empirical evidence from China," Technological Forecasting and Social Change, Elsevier, vol. 170(C).
    4. Cao, Hongjie & Li, Meina & Lu, Yuqi & Xu, Yang, 2022. "The impact of strengthening government auditing supervision on fiscal sustainability: Evidence from China's auditing vertical management reform," Finance Research Letters, Elsevier, vol. 47(PB).
    5. Lin, Boqiang & Zhou, Yicheng, 2021. "Does fiscal decentralization improve energy and environmental performance? New perspective on vertical fiscal imbalance," Applied Energy, Elsevier, vol. 302(C).
    6. Liangliang Liu & Wenqing Zhang, 2022. "Vertical fiscal imbalance and energy intensity in China," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 83(2), pages 509-526, October.
    7. Liangliang Liu & Wenqing Zhang, 2022. "Vertical fiscal imbalance and government spending on science and technology in China," Economic Change and Restructuring, Springer, vol. 55(3), pages 1953-1971, August.
    8. Dongmin Kong & Ling Zhu, 2022. "Governments’ Fiscal Squeeze and Firms’ Pollution Emissions: Evidence from a Natural Experiment in China," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 81(4), pages 833-866, April.

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    More about this item

    Keywords

    Fiscal transfers; Vertical fiscal imbalance; Fiscal sustainability; Fiscal space;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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