Spatial spillovers of local government fixed investment on fiscal gap: empirical evidence from spatial Durbin model

Over the past 20 years, the contribution of fixed asset investment by local government to economic growth and fiscal revenue has been significant. However, the traditional “investment-tax” linear model fails to fully account for the dynamic evolution of the fiscal gap within the complex spatial interactions. Therefore, it is essential to establish a simplified equilibrium model incorporating spatial interactions to examine the relationship between fixed asset investment by local government and the fiscal gap. It is employed the fiscal gap model to constructed the equilibrium analysis to analyze the multiplier effect and the crowding-out effect that influence the fiscal revenue, as well as the impact of fiscal expenditure preference effects by local government and policy attention effects by central government that influence the fiscal expenditure. Meanwhile, it is investigated the mechanisms of these four effects in the perspective of spatial spillover effects. For empirical verification, 31 provinces in China from 2003 to 2023 were taken as the study sample, it applies both static and dynamic time-fixed effect spatial Durbin models to explore the local effects and spatial spillover effects between these variables. The research yielded the following conclusions: (1) the fixed asset investment by local governments exerts a significant spatial spillover effect on the fiscal gap. (2) Fixed asset investment by local governments can narrow the fiscal gap in neighboring regions through spatial spillover effects. (3) The multiplier effect and the preference effect of fiscal expenditures generated by local government fixed asset investments in both adjacent regions and their own regions can collaborate to effectively reduce the fiscal gap. Based on the conclusion, it is proposed three suggestions: (1) develop a collaborative governance framework for regional finance and investment. (2) Enhance the revenue-sharing system for cross-regional investments. (3) Innovate the collaborative performance evaluation system for fiscal expenditures.