Research on the impact of vertical fiscal imbalance on the supply of basic public services from the perspective of tax effort

Purpose This paper investigates the impact of vertical fiscal imbalance (VFI) on local public service provision and environmental pollution, and examines the moderating role of fiscal transfers. Design/methodology/approach Using panel data from Chinese prefecture-level cities, we construct econometric models with a VFI index as the key independent variable. Dependent variables include basic public service supply and pollution emissions. Two-way fixed effects and instrumental variable methods are applied. Findings VFI significantly reduces the level of local public services, especially in fiscally weak regions. It also aggravates industrial pollution, suggesting that fiscal pressure may relax environmental regulation. General-purpose transfers mitigate the negative service effect, but earmarked transfers do not. Originality/value This study extends VFI research to public service and environmental outcomes, provides new empirical evidence from China, and reveals differentiated roles of transfer types, offering policy implications for fiscal reform.