Analyzing the Mechanism Between Local Government Debts and China’s Economic Development: Spatial Spillover Effects and Environmental Consequences

Abstract

Under the new normal of economy, a series of active fiscal policies such as tax reduction and fee reduction and new infrastructure construction in China have reduced the source of local government revenue, while the expansion of fiscal expenditure and the widening gap between revenue and expenditure have further exacerbated the motivation of local governments to borrow. Using the spatial econometric model and based on the data of 30 provinces in China from 2006 to 2018, this article deeply studies the impact of local government debt on economic growth and its spatial spillover effect and discusses the regional location heterogeneity of this growth effect. The research shows that: (1) local government debt has significantly promoted regional economic growth; (2) the growth promoting effect of local government borrowing has significant spatial spillover; (3) borrowing debt has the greatest effect on promoting economic growth in the central region, followed by the east, and the west is almost unaffected. Therefore, the Chinese government needs to continue to implement an active fiscal policy, improve the promotion and assessment mechanism of local officials, and adhere to the goal of balanced regional development.

Local Government Debt and Corporate Investment Behavior in China: Real versus Financial Investment

“…For instance, the investigation by Mao et al (2023) [6] reveals that the competitive economic growth objectives set by local governments serve as an endogenous root cause for the surge in urban debt in China. In addition, Cai and Song (2022) [7] confirm that the role of China's local government debt in fostering regional economic growth is notably significant. Moreover, this promotion exhibits a substantial spatial spillover effect, with the central region experiencing the most pronounced impact on economic growth, followed by the eastern region, while the western region remains largely unaffected.…”