Tax-Spend, Spend-Tax, or Fiscal Synchronization: A Panel Analysis of the Chinese Provincial Real Data

Abstract

In this paper we tested whether the hypothesis of tax-spend, spend-tax, or fiscal_x000D_ synchronization applies to the 31 Chinese provinces using cross-sectional and time series data covering 1999 to 2005. The interaction between government revenues and government_x000D_ expenditures is tested with the newly developed panel unit root tests and heterogeneous panel_x000D_ cointegration tests. The results show that both revenues and expenditures are non-stationary_x000D_ but have a significant long-run relationship. The results based on multivariate panel_x000D_ error-correction models show that there is no significant causality between revenues and_x000D_ expenditures in the short run. However, in the long-run, a bi-directional causality exists_x000D_ between revenues and expenditures, thus supporting the fiscal synchronization hypothesis for 31 Chinese provinces over this sample period.