Fiscal incentives and political budget cycles in China

Abstract

Political budget cycles in democracies have been extensively analyzed, but few studies of non-democracies exist. This paper explores political budget cycles in China’s provinces. The structural component of political decision making in China is actually similar to its democratic counterparts, even with an absence of general democratic elections, reflecting the motivation of politicians to stay in oce or be promoted. A simple theoretical model suggests that, in order to increase the odds of being promoted, politicians have an incentive to treat current expenditures and capital expenditures di↵erently. Using data from Chinese provinces from 1980 to 2006, the analysis finds that two years prior to the National Congress of the Communist Party (NCCP), politicians are likely to shift public spending toward capital expenditures, such as innovation funds and capital construction, and away from current expenditures, such as agricultural subsidies, social expenditures and government administration. The opposite pattern occurs during the year of the NCCP, when politicians increase current expenditures and decrease capital expenditures. The increased capital expenditures two years prior to the NCCP is accompanied by an increase in taxation and total aggregate spending. However, the e↵ects of a provincial leader’s tenure on political budget cycles are minimal, implying a weak causal relationship between spending composition and a politician’s time in oce at the provincial level.