Fiscal Transfer and Local Public Expenditure in China: A Case Study of Shanxi Province

Abstract

Given the vertical fiscal imbalance between the Chinese central and local governments and the overwhelming tasks imposed on local governments after the 1994 tax reform, intergovernmental fiscal transfer has become crucial for alleviating local fiscal shortages and funding local public services. Then how does fiscal transfer affect local public expenditure? Does it facilitate better public services? This article answers these questions by examining the spending behavior of county-level governments in Shanxi Province. The data analysis reveals that fiscal transfer does not necessarily motivate the recipients to provide better public services but rather encourages spending on economic construction. The findings suggest that to improve local provision of public goods and services, the management of fiscal transfers must be strengthened so as to prevent the diversion of funds to unintended uses, the transmission of fiscal transfers must be streamlined to guarantee timely payment, and local officials must to be motivated to invest more in public services.