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Central-local government fiscal relations and cyclicality of public spending: evidence from China

Author

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  • Jing Xing

    (Antai College of Economics and Management, Shanghai Jiao Tong University)

  • Clemens Fuest

    (ifo and University of Munich)

Abstract

In this study, we analyze how fiscal decentralization affects the cyclicality of government spending. We focus on China, which experienced fiscal decentralization during 1979–1993 and then partly centralized its revenue with the 1994 fiscal reform. By employing both time series and province-level panel data, we show that Chinese provincial and total government spending was strongly procyclical during the decentralization period before the reform, but both became significantly less procyclical with respect to nationwide output fluctuations after the reform. We suggest several channels through which the procyclicality of subnational government spending in decentralized fiscal federations could be restrained. We further find that less procyclical provincial government spending is associated with smaller output volatility.

Suggested Citation

  • Jing Xing & Clemens Fuest, 2018. "Central-local government fiscal relations and cyclicality of public spending: evidence from China," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(4), pages 946-980, August.
    • Handle: RePEc:kap:itaxpf:v:25:y:2018:i:4:d:10.1007_s10797-017-9478-8
    DOI: 10.1007/s10797-017-9478-8
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    More about this item

    Keywords

    Fiscal decentralization; Cyclicality; Government spending; Intergovernmental transfers;
    All these keywords.

    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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