Do public services affect economic growth? Evidence from China under the fiscal decentralization perspective

Abstract

This article examines the impact of public services on economic growth from the perspective of fiscal decentralization. It also analyzes the relationship between public services, economic growth, and innovation capability during the innovation-driven phase. The study utilizes a fixed-effects model based on panel data from 434 samples across 31 provinces in China from 2008 to 2021. The findings indicate that an increasing supply of public services promotes economic growth. However, fiscal expenditure and revenue decentralization exhibits a negative moderating effect, which hampers regional economic growth. This effect remains consistent across various robustness checks, including the replacement of core explanatory variables and lagged effects. Notably, there is heterogeneity in the impact on different regions: public services significantly enhance economic growth in western regions, while the effects in eastern and central areas are not significant. Furthermore, the negative moderating effect of fiscal decentralization is more pronounced in the western regions. Public services enhance the capacity for innovation and aid economic growth. However, fiscal decentralization still exerts a negative regulatory effect throughout this process, hindering the economic impact of public services and innovation capabilities.