A Study Of The Non-linear Effects Of Fiscal Expenditure

The world economy is still in an extended downturn since the 2008 financial crisis. The efficiency of fiscal policy, especially the effectiveness of fiscal expenditure is facing widespread and intense questioning. High government debt begins to bother the whole world. In the fog of the debt, every government policy makers are facing the tough choice, which one is right between fiscal tightening and Keynes’s fiscal stimulus. Since 2012, China’s economic growth also showed the trend of decline. the economy entered into a "new normal" pattern, and need to be implemented of positive fiscal policy to stimulate the economy growth. By the reason of owing to the rise in the current labor force, the actual cost of capital and land and other elements of the price. Inefficient resources allocation, supply and demand mismatch problem makes the conflicts of the reformation directed more on the supply side, so the resolving method is to make a full use of tax cuts and increase the counter cyclical fiscal expenditure, as the active fiscal policies. But the active fiscal policy on incremental tax cuts could lead a expansion to the gap between revenue and expenditure, making our country enter into a slow fiscal revenue growth, expenditure growth rigid fiscal deficits and the new normal pattern. In such a new financial norm, the positive fiscal policy is facing a tradeoff between a steady economic growth and the government debt risk. Therefore, study on fiscal expenditure and effectiveness of fiscal expenditure on economic growth, consumption and private investment, is not only inevitable requirement of normal economic reform, it is also the key to achieved the sustained growth of the national economy.In the literature of studying the relationship between fiscal expenditure and economic growth, the most instructive and influence one is the "Armey curve". Armey (1995) on the basis of the Laffer curve showed the scale of fiscal expenditure and economic growth exist a non symmetric relation. The Armey curve shows the nonlinear relationship between the scale of fiscal expenditure and economic growth. Then, whether is there a non-linear relationship between fiscal expenditure and economic growth? The in-depth study on this issue constitutes the starting point and the logical basis of this paper.In this paper, through the analysis of the effects of fiscal expenditure on economic growth, household consumption and private investment, we proposed that fiscal expenditure existed nonlinear effect hypothesis and use Markov regime model to test the hypothesis. Secondly, we analyzed the nonlinear effects of fiscal expenditure on economic growth, household consumption and private investment from theoretical and empirical angle. We analyzed the threshold of the fiscal expenditure by using the static and dynamic panel threshold model. On this basis, we analyzed the threshold of the fiscal expenditure structure on conomic growth, household consumption and private investment. We provided some ideas and methods to improve active fiscal policy.This paper is the designed of seven chapters content. Among them, chapter one is the introduction, mainly used for the introduces of the research background, research significance, research framework and content, and research methods and innovations; the second chapter, on the basis of we reviewed and commented on the existing domestic and foreign literature, we classified and summed up the lack of existing research. we study on the contents and methods of necessity; the third chapter, which we analyzed the nonlinear effects of fiscal expenditure on economic growth, is the logical starting point of this paper; the fourth, fifth and sixth chapters is the core content of this article, we studied the threshold effect of fiscal expenditure on economic growth, resident consumption and private investment. The seventh chapter is mainly used to summarize the full paper, and put forward the future research prospects.Through the above research, the conclusions are obtained:First of all, we analyzed the fiscal behavior during the recession and the period of economic prosperity by reference to the Alesina and Tabellini (2008) and Fang Hongsheng and Zhang Jun (2009) method. The research conclusion is that China’s overall fiscal expenditure showed Counter cyclical fiscal policy on the basis of the country’s data, but the local government fiscal expenditure showed asymmetry on the basis of 31 provinces’s data, mainly reflects in the period of economic recession, the local government showed the inverse cycle characteristics, through government procurement, infrastructure construction and other expansionary fiscal policy to stimulate domestic demand. But in the period of economic prosperity the performance showed cyclical characteristics, which means that no matter in the period of economic prosperity or recession, Chinese local governments showed a strong expansion Tendency.Secondly, through the analysis of the effects of fiscal expenditure on economic growth, household consumption and private investment, we proposed that fiscal expenditure existed nonlinear effect hypothesis. We use Markov regime model to test the hypothesis. The research conclusion is that the relation of fiscal expenditure on economic growth, household consumption and private investment existed nonlinear effect. The nonlinear effect was divided into two areas. Further analysis found that the time period is largely overlapping. In 1993-1996, the financial expenditure on household consumption and private investment are crowding-out effect. The coefficient estimates are -0.023 and -0.067. Therefore, the effect of fiscal expenditure on economic growth is not positive and close to zero. The 2008-2014, fiscal expenditure on household consumption and private investment are crowding-in effect, the coefficient estimate are 0.019 and 0.043 respectively. The effect of fiscal expenditure on economic growth is positive accordingly. Thus it can be seen that when the economy is in a period of overheating, the effects of fiscal expenditure on economic growth is not positive. When the economy is in a period of downturn, the effect of fiscal expenditure on economic growth is positive.Thirdly, this paper analyzed the nonlinear effects of the fiscal expenditure on economic growth, resident consumption and private investment by constructing theoretical model from a theoretical point of view. We investigated an inverted U-shaped relationship between the fiscal expenditure on economic growth, resident consumption and private investment. Based on that, we analyzed the threshold of fiscal expenditure by employing static panel threshold model and dynamic panel threshold model. The research conclusion is that the threshold of fiscal expenditure on economic growth, resident consumption and private investment is 24.9%,19.1% and 24.9% respectively; The threshold of proportion of fiscal productive expenditure and non-productive expenditure is 1.307,1.237 and 1.236 respectively; The threshold of proportion of fiscal economical expenditure and non-economical expenditure is 0.551,0.564 and0.541 respectively.Finally, by the above analysis showed that the scale of fiscal expenditure was divided into four intervals by the threshold of China’s fiscal expenditure on economic growth, consumption and private investment. When the scale of fiscal expenditure is lower than 19.1%, the impact of fiscal expenditure on economic growth, consumption and private investment are positive. The role of fiscal expenditure is in a safe area. When the scale of fiscal expenditure is in (19.1%,24.9%), the effect of fiscal expenditure on household consumption has turned form crowding-in effect to crowding-out effect. Because the effect of the financial expenditure on private investment still has crowding-in effect, fiscal expenditure on economic growth in this region is still promoting. The scale of fiscal expenditure is in light district. When the scale of fiscal expenditure is in (24.9%,31.4%), the impact offiscal expenditure on private investment is crowding-in effect. Because the impact of the financial expenditure on economic growth and consumption are crowding-out effect, the scale of fiscal expenditure is in the districts. When the scale of fiscal expenditure is higher than 31.9%, the impact of financial expenditure on economic growth, consumption and private investment are crowding-out effect. Because the scale of fiscal expenditure is in the district crime, the government should pay attention to expansion the scale of fiscal expenditure.