Fiscal competition and the structure of local public expenditure in China

Abstract

This article examines the impact of intergovernmental fiscal competition on local public expenditure in China under current performance assessment system in which GDP is a critical factor. First, we present the assignment of public goods and tax burden and the share of foreign direct investment (FDI) of 30 provinces, and we find that current fiscal competition in China has taken the form of public expenditure improvement accompanied by preferential tax policies. Second, we regress the share of FDI on different components of provincial public expenditure, and find that the share of FDI is correlated negatively with the public service, tax burden and health care service while positively with infrastructure development. Therefore, FDI-based infrastructural investment crowds out public services investment, which fails to support the view that fiscal competition improves social welfares.