Fiscal disparities among local governments in Zhejiang Province, China

Abstract

ABSTRACT Although nearly all local governments in China face serious fiscal challenges, fiscal pressures on some local governments are more severe than on others. Using data from 2011 through 2016, this paper measures the relative fiscal condition of local governments in a single Chinese province as a means of quantifying fiscal disparities within the province. We measure the fiscal gaps between local governments’ expenditure needs and revenue-raising capacity. Expenditure needs are estimated using a regression-based strategy to identify a set of characteristics of each local government that influence the costs of delivering local public services. We measure own-source revenue-raising capacity as a function of both local GDP and actual local government revenues. Although fiscal disparities remain, they are substantially reduced after the receipt of equalizing intergovernmental transfers. Because per capita transfers to rural local governments are much larger than transfers to large city governments, post-transfer fiscal health is actually weaker in the province’s larger cities than in smaller, more rural jurisdictions.