The Mechanism of Vertical Fiscal Imbalance Affecting High-Quality Economic Development : A 3SLS Estimation Based on Local Government Tax Effort and Expenditure Structure.

Ke, Wang and Venus Liew, Khim Sen (2025) The Mechanism of Vertical Fiscal Imbalance Affecting High-Quality Economic Development : A 3SLS Estimation Based on Local Government Tax Effort and Expenditure Structure. International Journal of Academic Research in Economics and Management Sciences, 14 (3). pp. 270-386. ISSN 2226-3624

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Abstract

Against the backdrop of China’s transition toward high-quality economic development, it is imperative to explore the mechanisms through which the fiscal system influences development quality. This study employs panel data from 30 Chinese provinces spanning 2008 to 2022 and applies a Three-Stage Least Squares (3SLS) estimation to examine the impacts of vertical fiscal imbalance, local government tax effort, and expenditure structure on high-quality economic development. The results reveal that vertical fiscal imbalance not only directly constrains development quality but also exerts indirect effects by weakening tax effort and increasing the proportion of livelihood-related public expenditures. The decomposition of effects shows that the direct effect dominates in the tax effort pathway, whereas the indirect effect is more pronounced in the expenditure structure pathway. The findings suggest that region-specific policies and optimized fiscal decentralization are essential to promoting sustainable development.

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