The Research Of Relationship Between Local Government Expenditure And Economic Growth

At the end of 2008, a global economic recession which was triggered by submortgage credit crisis, brought about a great impact on the economic development in china. In response to this, Chinese government restarted the proactive fiscal policy and monetary policies, and worked out an unprecedented scale of government investment and economic stimulus package. The effect of the proactive fiscal policy is indubitable, and the evidence is china's rapid economic recovery and the strong growth momentum. However, the fiscal expenditure is still relaying on the expansion, such as focusing on the construction of infrastructure. And most of the expenditure goes to the leading state-owned companies, barely to the departments of welfare assurance, consumption simulating, technique improving or the adjustment of economic structure. Therefore, some people are concerning about the effect and continuity of the fiscal expenditure, which is, whether the increasing of the fiscal expenditure can bring about more private investments and consumptions, both adjust the mode and improve the quality of the growth along with the quantity raising.How does the fiscal expenditure cause the growth? What should the government do in order to strengthen the efficiency of the adjustment and to form a continuous path of growth, by controlling the size and the structure of the expenditure? There has been a great many studies around these two questions, from whether the governmnent should do it to how to do it. And the research on the contributions of fiscal expenditure to economic growth varies from theoretical arguments to empirical analysis, focusing on the measurement of the effect under different conditions, such as different systems or policies, and comparing it with the current conditions in China. Studies show that anti-circle expenditure have a positive effect on the economic growth, but it can also bring about problems like unbalanced structure, the gaps in revenue allocation and too much relay on the investments and exports, which harms both the stability and quality of the growth. Can fiscal expenditure solve these problems? Can it cause more private consumptions and investments along with the growth? Can it provide long-term sopports to China's growing economy? Aiming to answer these questions, this paper reexamines the effect of local governments' expenditure on economic growth from three different ways, including the increasing, investments and consumptions. Also this paper tries to judge the efficiency and stability of fiscal expenditure by studying the impact of local governments' behavior on other growing paths.Specificly, based on other researches on the growing effect of fiscal expenditure, Chapter Three provides a totally measurement of the expenditure and economic growth. Results show that local governments's fiscal expenditure has a leading position, which explains why the writer chooses governments in province level as the objects of this study. However, the growing effect of fiscal expenditure shows time-varying characteristics. Moreover, different kinds of fiscal expenditure differ in the impact. Since the expenditure in producing and investing fields has a stronger effect on the economic growth, it won't be difficult to understand why the governments are longing for investments and most expenditure goes to production and microecnomic fields rather than welfare and public goods under today's judging system. Therefore, the conflict in the structure results in the distort of judging system between different levels of local governments.Chapter Four focuses on the relationship between the fiscal expenditure and private investments, and the result of impulse response analysis actually denies the long-term effect of the former to the latter. The increase in fiscal expenditure can speed up the raising in private investments in a short term, though, the relationship will turn around as time goes by. There isn't obvious Crowding-In Effects in the long term. In the meantime, central investments cannot bring about more private investments. The conclusion is that the stimulating plans in economy is more or less the replacement of private investments and nongovernmental economy, and positive fiscal expenditure can only cause the growth in economy by producing more direct social demands. And thus there have been two circles. One is among the state-owned economy and the other is in the privacy economy. In the first circle the increase in fiscal expenditure and investment creates a strong demand, which passes along the industrial chains to competitive industries, also the privacy economy, and finally causes a weak raise in private investments. Nevertheless, the relativity of these two circles and the increase in interest rates caused by the limit of money supply will crowd out private investments in a long term to form a relatively separate situation. If we bring in the preferences of local governments in investments, along with the interference of national assets to the traditional industries, this Crowd-Out Effect can happen in a rather shorter term. Therefore the positive fiscal expenditure actually worsens the unbalanced structure. Chapter Five turns to the consumption area and try to answer the following questions. Can fiscal expenditure bring about more consumption, as well as enlarge the national market? Or can it help form the consumption driving system? Due to the flexibility of the model, we add controlling variable, which measures the characteristics of government behavior, to our local consumption model when using panal data, and it works well. The relative differences in the expenditure sizes, called as the Big Government Mode and Small Government Mode, as well as in the restrictions, have a positive impact on the effect of fiscal expenditure to consumption. General speaking, under Big Government mode, the Crowd-in Effect of fiscal expenditure to private consumption is stronger. In the meantime, the Crowd-out Effect of local governments'producing expenditure to private investments can be observed, while the non-producing expenditure works in the opposite way. Therefore, the increase in both non-producing expenditure and payments transfer has a positive contribution to the consumption.Nevertheless, all of the above base on the building of the restraint system and the supervising department. The empirical study shows that a Small Government Mode seems more useful as the local governments'function turns to public services. However, without proper restraint system and supervising department, the amount of out-budget money will grow, and the distort in the local governments'input-output system will be strengthened, both of which may cause a totally different conclusion.After all of the above research, in Chapter Six the writer analyzes the relationship between the wisdom of the local governments and the efficiency of the expenditures. According to the characteristics and demands of current local governments'behavior, we rebuild the input-output system of local government's expenditures by focusing the measurement of the expenditure's effiency on the achievement of controlling target, while most former studies put attentions on either the function of public services or the ability to provide enough public goods. Result shows big differences in local governments's expenditure efficiency, as well as great room for improvement. In this way, the optimization of future fiscal expenditure can be realized by improving the efficiency rather than enlarging the size.Apart from that, the study of governments'efficiency also reveals the local characteristics of governments in different locations. Especially, the efficiency of the governments in the Middle Area is getting worse. Based on this, further study supports the Small Government Mode. But it differs in the West Area, in which the larger the size of the expenditures and the stronger the interference, the better the growth and efficiency of economy. As we can see, there're totally different ways to improve the efficiency while the progress of economy differs.