How does digital finance alleviate fiscal stress? Evidence from China

Abstract

The impact of digital finance on fiscal stress is an important issue in achieving high-quality financial development. Based on the theoretical analysis of digital finance and fiscal stress, this paper utilizes data from 285 cities in China spanning from 2011 to 2020, empirically tests the impact of digital finance on fiscal stress by employing fixed effect model and spatial Durbin model, and identifies the influence mechanism. The results demonstrate that: (1) The development of digital finance can significantly alleviate fiscal stress, which remains valid after conducting a series of robustness tests. In addition, the impact of digital finance on fiscal stress predominantly originates from the coverage breadth of digital finance. (2) Mechanism analysis reveals that promoting the increase of fiscal revenue and improving the efficiency of fiscal expenditure are crucial mechanisms for digital finance to alleviate fiscal stress. (3) Heterogeneity test indicates that digital finance has a more significant alleviating effect on fiscal stress in central regions and cities with higher levels of economic development. (4) The spatial effect test suggests that digital finance exhibits a significant spatial spillover effect on fiscal stress, and an enhancement in digital finance level in a region will reduce fiscal stress in its neighboring regions. The above findings offer insightful guidance for government to better utilize digital financial tools to manage debt, optimize the structure of fiscal revenue and expenditure, and promote sustainable financial development.