Scrutiny and Spending Shifts: How Participatory Budgeting Reduces Local Government Debt

Abstract

Fiscal capacity is a core dimension of state capacity. Effective oversight of public expenditure is therefore essential for fiscal sustainability, a foundational element of sustainable development. As local government debt has steadily increased in China, participatory budgeting has emerged as an innovative mechanism for citizens to exercise such oversight and influence fiscal decisions. Our paper examines the effect of participatory budgeting on local government debt in China. Using a panel dataset covering 242 Chinese cities from 2013 to 2022, we examine the effect of participatory budgeting adoption on the scale of explicit government debt. Our results show that adopting participatory budgeting moderately reduces local government debt levels. Further mechanism analysis indicates that participatory budgeting operates through two channels. First, by enhancing budgetary transparency, it strengthens public scrutiny, which in turn disciplines government borrowing. Second, it redirects public spending toward welfare sectors like education and health, thereby crowding out large, debt-financed investment projects. Our findings contribute to the literature on participatory budgeting, fiscal democracy, and bottom-up accountability in public finance. The results suggest that participatory budgeting can be an effective policy tool for improving fiscal discipline and curbing government debt risks, ultimately fostering more sustainable and equitable local governance.