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| Expected Fiscal Revenue Growth and Local Government Financing Strategies: Evidence from Prefecture-Level Cities in China |
| YU Jinliang, WANG Wenxiu, QI Yu, LI Wenqing
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School of Economics and Trade, Hunan University;
School of Public Finance and Taxation, Zhongnan University of Economics and Law |
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Abstract The growth of non-tax revenue, increasing debt risks, and the manipulation of fiscal statistics at the local governments have long been the focus of intense debate in China. For example, the National Audit Office reported that 70 local jurisdictions overstated fiscal revenues by 86.13 billion yuan in 2022. In addition, the share of non-tax revenue in general budget revenue rose from 11.05 percent in the first quarter of 2009 to 20.36 percent by the fourth quarter of 2024.
A large body of literature explains these behaviors of local governments from the perspectives of fiscal pressure and GDP promotion tournaments. Notably, since the Reform and Opening-up policy, most practices of the planned economy have been abolished. However, the system of fiscal revenue growth target (Henceforth, FRGT) has been largely retained and, together with GDP and other economic growth targets, continues to serve as a central instrument in implementing China's development strategies across different stages. According to the Budget Law of the People's Republic of China (2018 Revision), governments at all levels announce their annual FRGT at the beginning of each year to the People's Congress. After that, the FRGT is transmitted to local tax collection agencies, where it becomes their mandatory objective. Departments that meet or exceed their targets may receive financial rewards and career promotion opportunities, whereas failure to achieve them can result in both economic penalties and the dismissal of department heads.
FRGT functions as an incentive mechanism within China's multi-tiered government system. While the central government primarily uses FRGT to secure stable funding for its functions, local governments also treat them as a signal of administrative competence. The combination of a complex administrative hierarchy, numerous local jurisdictions, and intricate fiscal information makes it difficult for higher-level authorities to fully monitor compliance. As a result, local governments are both motivated and positioned to engage in strategic revenue management.
Utilizing prefecture-level panel data from 2011 to 2020, this study empirically investigates the impact of FRGT on local government financing strategies. The results show that there is a significant increase in the share of non-tax revenue and local taxes. Revenues from state-owned capital operations and the revenue from the compensated use of state-owned resources and assets respond more strongly to FRGT. Surprisingly, in regions with lower dependence on transfer payments and better economic and fiscal conditions, the responses are more pronounced. Moreover, heterogeneity in legal institutional quality and state capital endowments contributes to regional variation in responses. Bunching estimates further reveal that 10.65% of the sample exhibits signs of strategic data manipulation around FRGT. Further analysis reveals that issues such as subsidies are crucial for understanding the relationship between FRGT and local government revenue management strategies. Finally, empirical evidence suggests an asymmetric response of government expenditure categories to fiscal revenue growth targets, a pattern that merits attention and further investigation.
These findings have important implications for the reform of China's fiscal system. Firstly, reducing the emphasis on FRGT in performance evaluations could shift incentives toward greater fiscal transparency and sustainability, mitigating distortions caused by an excessive focus on revenue collection. Secondly, reforming local governments' command-driven approach to tax collection and strengthening auditing and oversight would promote rule-based, standardized administration. This reform would also reduce the workload of lower-level agencies and foster a more transparent business environment. Thirdly, as reforms of the intergovernmental fiscal system advance, policymakers should consider how local governments respond to institutional changes. They should also strengthen communication and coordination mechanisms and balance centralization with decentralization to guide local authorities toward improving the efficiency and quality of public service delivery.
The potential contributions of this study are threefold. Firstly, it clarifies the theoretical mechanisms through which FRGT influences local governments' strategic revenue management. Secondly, by compiling detailed fiscal data at the prefecture level, the study systematically distinguishes and empirically identifies collection strategies across taxes and non-tax revenues, within different non-tax categories and different tax categories, revealing several key patterns that go beyond prior expectations. Thirdly, it applies a Bunching estimation strategy to directly quantify the extent of revenue overstatement under the fiscal revenue growth target system and to identify the primary operational methods employed by local governments, along with their corresponding consequences.
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Received: 22 July 2024
Published: 02 December 2025
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