What causes the local fiscal crisis in China: The role of intermediaries

Local governments in China are seriously under-funded relative to their assigned expenditure responsibilities for public services, resulting in the infamous ‘revenue–expenditure gap’. The dominant explanation of local fiscal difficulties given in the literature refers to central government behaviour, namely the excessive centralization of tax revenue, but it does not tally with the large flows of central subsidies to local coffers in more recent years. The alternative account we put forward stresses the working of an intermediary level embedded in the multi-tiered governance structure of a large country, and the interaction between local officials’ fiscal behaviour and the revenue–expenditure gap. Employing fine-grained analysis of aggregate statistics and local case data, we argue that broader intergovernmental dynamics and practices of local intermediaries, and not only central government policy, are critical to fiscal health and government performance at the county level.