Decentralization,Local Public Expenditure and Economic Growth in China

Previous studies focus on the impact of fiscal policy on aggregate demand but ignore the potential growth effect of fiscal policy.Nowadays,some researchers show that economic growth is affected not only by fiscal policy due to the effect of public expenditure on capital accumulation,but also by fiscal decentralization which will determine local government's incentives.Existing empirical evidence on the above two channels is,however,not enough.Based on a provincial panel data during 1994—2005 in China,this study simultaneously considers the relationship among fiscal decentralization,public expenditure and economic growth.We find that both the off-budget expenditure by provincial government and fiscal decentralization significantly hurts economic growth,while other fiscal expenditure variables have insignificant effect on economic growth.Moreover,human capital accumulation and increased trade openness could contribute to economic growth significantly.These findings are of important reference value for future fiscal policy adjustment and fiscal institution reform in China.