Summary:
The Chinese government has consistently played a proactive role in economic development. Over the past two decades, local governments have promoted substantial infrastructure investments, primarily through land-based finance and off-balance-sheet debt instruments. Notably, the “4-trillion yuan” stimulus package launched in 2009 aimed to boost economic growth through counter-cyclical measures. While these policies significantly enhanced short-term economic performance, they also led to the accumulation of local government debt burden. As the Chinese economy entered a period of deep structural adjustment, traditional growth drivers gradually weakened, and risks associated with local government debt became increasingly prominent, making implicit local government debt a critical issue in policy regulation. In recent years, China has further intensified and refined its fiscal policy tools. In October 2023, the government issued an additional one trillion yuan in sovereign bonds and raised the fiscal deficit ratio. Throughout 2024, multiple rounds of additional bond issuances and debt restructuring policies have been introduced, aiming to stimulate economic recovery through expanded fiscal expenditure. However, whether the rapid increase in government debt can effectively drive economic growth, and to what extent it can do so, remains an open question. Addressing these issues fundamentally requires a scientific estimation of the fiscal expenditure multiplier. The higher the fiscal multiplier, the more significant the impact of expansionary fiscal policy, and the greater the potential to ease pressures on the economic recovery. Against this backdrop, China began implementing a local government implicit debt swap program in 2015. The core objective of this policy is to alleviate local governments' debt burdens and improve the efficiency of fund utilization by replacing inefficient and high-cost implicit debt with more transparent financing mechanisms. However, the actual economic effects of this policy have not been fully assessed. Existing studies show significant divergence in fiscal multiplier estimates and generally lack effective control for policy endogeneity. To fill this gap, this paper focuses on the following core research questions: Has the local government debt swap significantly promoted local economic growth？ How should the fiscal expenditure multiplier be accurately estimated, and does its magnitude exhibit heterogeneity under different economic conditions？ What are the underlying mechanisms through which local fiscal expenditure influences growth？ Does the implicit debt swap generate spillover effects that impact coordinated regional development？ This study combines theoretical analysis with empirical investigation. On the theoretical side, it first provides a comprehensive review of classical studies on fiscal multipliers. It then links the local government implicit debt swap policy with local fiscal expenditure, exploring its potential impacts on fiscal spending and economic growth from the perspectives of debt structure optimization and improved fund utilization efficiency. On the empirical side, leveraging the exogenous nature of the debt swap policy, this paper utilizes a panel dataset at the prefectural level and employs a difference-in-differences (DID) model to identify the policy effects, supplemented by instrumental variable (IV) methods to estimate the fiscal expenditure multiplier more precisely. To ensure the robustness of the results, multiple heterogeneity tests and robustness checks are conducted, including subgroup analyses based on economic cycles, household leverage levels, and initial regional capital stocks. The main data sources include the CEIC database, the Wind database, and annual City Statistical Yearbooks, covering the period from 2010 to 2021. This study first quantifies the implementation scope and intensity of the implicit debt swap policy and then estimates its direct effects on local fiscal expenditure and economic growth. The results show that the implicit debt swap policy significantly increased local fiscal expenditure, thereby stimulating rapid regional economic growth. Specifically, after the debt swap, fiscal expenditure in the treatment group increased by 20.62% relative to the control group, while regional total output rose by 40.64%. Fiscal multiplier estimation results indicate that a 1% increase in local fiscal expenditure leads to a 2.071% increase in cumulative regional output, corresponding to a fiscal multiplier significantly greater than 1. This finding suggests that local fiscal expenditure in China yields extremely high marginal returns. Further heterogeneity analyses reveal several important conclusions. First, the fiscal multiplier is significantly influenced by the state of the economic cycle. When the economic growth rate falls below the potential growth rate, the fiscal multiplier increases markedly. This result is consistent with the theory of counter-cyclical macroeconomic policy: when effective demand is insufficient, expansionary fiscal policy has a stronger stimulative effect on economic growth. Second, high household leverage significantly weakens the effectiveness of fiscal policy, reducing the fiscal multiplier. This finding aligns with the balance sheet recession hypothesis, which posits that when private sector debt levels are excessively high, households tend to prioritize debt repayment over consumption or investment, thereby weakening the economic impact of fiscal expenditure. Third, the initial regional capital stock levels do not show a significant effect on the fiscal multiplier. This suggests that China's high fiscal multiplier primarily stems from direct demand-side effects rather than long-term supply-side factors such as capital accumulation or productivity improvements. This finding further underscores the crucial role of short-term demand management through fiscal policy in China's macroeconomy. Based on the above analysis, this paper offers several policy recommendations. First, a more proactive fiscal stance should be adopted. The large fiscal multiplier estimated in this study indicates that the Chinese economy has been operating below its potential output for an extended period, implying a persistent effective demand gap. Under such conditions, fiscal authorities should actively fill the demand shortfall through more expansionary fiscal policies, including breaking through the conventional 3% deficit-to-GDP ceiling and adopting stronger counter-cyclical measures. Second, local governments should continue to alleviate their implicit debt burdens through debt swaps. For local governments with heavy hidden debt burdens, debt swaps effectively expand fiscal space and promote higher output. Hidden debts not only increase financing costs but also elevate financial risks. In the coming years, the government should continue to vigorously implement debt swaps under strict controls on new implicit debt, aiming to eliminate existing implicit debts through refinancing bonds and other instruments. Third, greater fiscal efforts should be initiated at the central government level. Local government debt lacks macroeconomic stabilization functions and must eventually be repaid from future revenues, limiting its counter-cyclical effectiveness. By contrast, debt issued by a sovereign central government denominated in its own currency does not necessarily require future repayment and can sustain long-term macroeconomic management. Thus, future counter-cyclical fiscal policy should rely more on central government leverage to maintain low government borrowing costs and expand fiscal capacity. Lastly, structural deleveraging efforts should be sustained to maintain the overall macro leverage ratio while selectively reducing debt levels in vulnerable sectors. This paper's heterogeneity analysis finds that excessively high private debt levels diminish the effectiveness of fiscal policy. Proactively reducing private sector debt burdens under policy guidance is crucial to avoiding a balance sheet recession and enhancing fiscal policy efficiency. This paper contributes to the literature in four major ways. First, by selecting appropriate instrumental variables, it estimates a relatively large local fiscal expenditure multiplier. We argue that the chosen instrument exhibits greater exogeneity, leading to more accurate estimates. Second, it explores the transmission mechanisms behind the fiscal multiplier, suggesting that the large multiplier effect primarily arises from demand-side channels—specifically, government spending increases private sector incomes, thereby generating multiplier effects. Third, the paper successfully identifies the causal effects of the 2015 implicit debt swap policy on local fiscal expenditure and regional output. Given the enactment of the new Budget Law and the scale of the debt swaps totaling several trillion yuan, empirically evaluating this major fiscal initiative is of great importance. Lastly, on the policy front, the paper provides robust empirical support for China's current macroeconomic regulation strategies and debt restructuring initiatives.
刘磊, 王辉. 中国地方财政支出乘数研究[J]. 金融研究, 2025, 537(3): 188-206.
LIU Lei, WANG Hui. Estimation of Local Fiscal Expenditure Multipliers in China. Journal of Financial Research, 2025, 537(3): 188-206.
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