Conclusions and Policy Recommendations

This chapter synthesizes the main empirical findings of this book and discusses their implications for optimizing China’s central-local fiscal relations. Drawing on a series of econometric analyses, including ordinary least squares regressions and regression discontinuity designs, this chapter examines how fiscal decentralization and intergovernmental transfer payments affect local government behaviour, economic growth, population mobility and investment outcomes. The results show that fiscal decentralization can not only enhance local incentives and stimulate regional economic development but may also lead to distortions in public expenditure allocation and widen regional disparities if not supported by an effective transfer payment system. The empirical analysis provides robust evidence of a flypaper effect in intergovernmental transfers, whereby transfer payments increase local public spending more strongly than equivalent increases in local fiscal revenue. In addition, this chapter highlights substantial heterogeneity in the effects of different types of transfer payments. General-purpose and special-purpose transfers exert distinct influences on local fiscal behaviour, population mobility and fixed asset investment, reflecting differences in fiscal flexibility, earmarking constraints and local policy incentives. While transfer payments can alleviate fiscal constraints and support local economic activity, poorly designed transfer mechanisms may weaken fiscal discipline and reduce allocative efficiency. Based on these findings, this chapter advances several policy recommendations aimed at improving the effectiveness of China’s fiscal system. These include clarifying expenditure responsibilities across different levels of government, optimizing the composition and targeting of intergovernmental transfers, strengthening incentive-compatible fiscal arrangements and enhancing transparency and accountability in fiscal governance. Overall, this chapter offers an integrated empirical and policy-oriented assessment of China’s fiscal decentralization framework and provides practical insights for promoting coordinated and balanced regional development.