Budget rollover and year-end spending in China: evidence from public procurement contracts

Abstract

This paper exploits the reform of China's Budget Law, which restricts the rollover of fiscal surplus across years, to examines the impact of UILI (use-it-or-lose-it) budget rules on year-end spending spikes. We analyze the universe of public procurement contracts from 2014 to 2021 and develop a method to assess contract quality. We show substantial surges in procurement contracts at the end of the year, which are more likely to be of low quality. The difference-in-difference model indicates that after the reform, local governments award 25.8 % more procurement contracts and double spending on procurement in the last month of the year. The year-end spending surges concentrate on goods and construction projects procurement, high-value contracts, and favor local suppliers. It is likely that UILI rules intensify budgetary uncertainty embedded in hierarchical allocation of fiscal fund.