Fiscal policy and economic growth: some evidence from China

Abstract

China has experienced profound economic and social changes in recent decades. During this period, China’s fiscal policy framework has been substantially reformed. The objective of this paper is to better understand the key features of the Chinese fiscal system and their impact on China’s economic growth. The study performs empirical analysis to identify the relationship between fiscal policy variables and economic growth. Its evidence suggests that local expenditures growth has a larger impact on output growth than central expenditures growth. The results also reveal that the response of output growth to anticipated changes in taxation was impeded by liquidity constraints. During the initial stages of market-oriented reform, growth of public investment in manufacturing sector contributed the most to output growth. During more recent periods, public investment in R&D made a substantial contribution. In addition, evidence indicates that long-term debt has a significant influence on China’s fiscal system, especially on government revenues.