Investment growth target and the composition of government expenditure: Theory and evidence from China

Abstract

In the target system of local governments, investment targets have a significant influence on their behaviors. This paper examines the impact of investment target setting on local governments’ fiscal expenditure composition. The theoretical model suggests that investment targets have a positive impact on the proportion of productive expenditure. Based on manually collected investment target data at the prefecture level, the study examines the impact of investment targets on the structure of fiscal expenditure. The findings reveal that investment targets have a significantly positive effect on infrastructure investment expenditure, a significantly negative effect on education and scientific expenditure, and no significant effect on medical and health, as well as family planning expenditure. Baseline results still stand under a battery of robustness checks. Further analysis shows the positive effect of public productive expenditure on regional investment growth rates, indicating improvement in public investment is an important channel to reach investment targets. This paper not only expands research on government objectives but also provides a new perspective on explaining the structure of fiscal expenditure.