Abstract：This paper both theoretically and empirically investigates the impact of local government spending on the environment under the institutional background of China’s fiscal decentralization. Our analysis suggests that local fiscal expenditure could generate not only direct environmental effects by providing environmental public service, but also indirect ones through economic development. Codetermined by the direction and extent of both influences above, the net effects of local government spending would present significant regional differences. Using municipal data from 2003 to 2011 in China, our empirical study, based on a two-equation dynamic panel model, provides strong evidence for the theoretical implication. The results indicate that local public spending could not cast any positive direct impact on environment quality, and the indirect impact, taking up a major position, is highly correlated to the levels of local economy. For the vast majority of cities in China, the net environmental effects of fiscal expenditure have proved to be negative at the present stage. Specifically, the growth of local fiscal spending may deteriorate the environment quality in eastern China, while having a positive but weaker effect for central and western areas.
Keywords: Local Fiscal Expenditure, Environmental Effect, Direct Effect, Indirect Effect
source:Finance & Trade Economics ,No2,2014