Are government budgets a visible stabilizer? Evidence from China since the tax-assignment reform

Abstract

Purpose: This study quantitatively examines the relationship between economic fluctuations and government budget size in the context of China’s fiscal decentralization, drawing inspiration from theoretical predictions of the Keynesian view and empirical studies on other economies. Design/methodology/approach: The panel comprises 31 provinces or equivalents in mainland China, spanning from 1994 to 2019. Diverse estimation strategies including two-way fixed effect regression, the generalized method of moments (GMM) and threshold regressions are, utilized. Findings: The results suggest that under the “tax-assignment system”, neither the central government’s fiscal transfers nor the provincial budgetary revenues or expenditures help reduce economic volatility. Surprisingly, some regression outcomes suggest that government size measures destabilize business cycles. Originality/value: While the study does not provide supportive evidence for the stabilizing effect of public budgets in Chinese provinces, it promotes a rethinking of the government’s intricate role in macroeconomic stabilization in the context of China’s fiscal decentralization.