Research On The Extensive Impact Of Transfer Payment From Province On Municipal Expenditure Scale In China

The research on intergovernmental transfer payment and the size of government is quite popular. As the mobility of productive factors across regions increases, local governments compete with each other. Without legislative power on tax, local governments in China have to increase expenditure, resulting in the tendency towards the expanding scale of local government expenditure. Generally speaking, the local government are barely in line with the central government towards the public service preference. To maximize local benefit, the government is unwilling to invest in the public goods with the property of spillover. If the central government intends to encourage the local one to supply more public goods via a series of grants, the opportunism which local government could manipulate to get a max grant arises. The more grant from upper government, the less budget restriction on the expenditure of local government.Possessed of less revenue, local governments in China shoulder a larger responsibility for expenditure. As a result, the transfer payment occupies a big proportion in local government revenue. This paper indicates that in the system of political performance assessment based on economy, the local governments, when faced with budget restriction, would make the decision of increasing investment on infrastructure and contracting the supply of public goods in order to attract the inflow of factors for the better economic performance. In this case, the central government can stimulate local governments to increase the supply of public goods by taking advantage of the matching grant or equalization transfer payment. In this process, the size of local government inevitably expands. This paper uses the panel data of municipals in China from 2003 to 2009 to analyze the effect of three kinds of transfer payment, including tax rebates, general lump-sum grants and special lump-sum grants, on the government size. The result shows that there is a positive correlation between transfer payment and government size.