Political budget cycles, government size, and the allocation of public funds: Evidence from prefectures in China

Abstract

We investigate political budget cycles in prefecture-level cities in China by leveraging cross-province variation in the timing of the Provincial Congress of the Communist Party, which is the most significant event for promoting and reappointing prefecture leaders. Our findings reveal strong evidence of a cyclical pattern, characterized by an increase in government spending leading up to the Congress, followed by a decrease afterward. This trend is particularly pronounced for infrastructure spending, which is a crucial driver of economic growth in China. Additionally, we examine China's multi-layer government hierarchy and explore heterogeneity across prefectures. Our analysis shows that these cycles are especially evident when promotion opportunities for prefecture leaders are most prominent. In terms of revenue sources, we do not observe significant cyclical patterns for in-budget revenues; however, we do find evidence of cycles in revenues from land sales, a vital source of off-budget revenues. Our study contributes to the literature by examining both the size of government and the allocation of public funds in order to uncover distinct political budget cycles at the prefecture level in China and highlighting the vertical incentives within the multi-layer government hierarchy.