Welfare public service expenditure, financing platform debt, and economic growth: Evidence from China

In the context of slowing economic growth, increasing welfare public service expenditure and reducing the debt of financing platforms represent a real contradiction faced by China’s current fiscal and taxation system. Based on the data of cities in China from 2010 to 2023, this paper studies the impact of increased welfare public service expenditure on the expansion of financing platform debt and discusses the economic effect of increasing welfare public service expenditure. The study finds that increasing welfare public service expenditure accelerates the expansion of financing platform debt, and the conclusion is still valid after a series of robustness tests. Heterogeneity analysis reveals that the higher the local government’s fiscal self-sufficiency ratio or the more ambitious the economic growth targets, the stronger the promoting effect of increased welfare public service expenditure on the expansion of financing platform debt. Conversely, the higher the transfer payment income, the weaker the promoting effect. Mechanism analysis indicates that increasing welfare public service expenditure can accelerate financing platform debt expansion by attracting population inflows, which in turn has a non-linear, inverted U-shaped effect on economic growth. This study offers a new explanation for the underlying mechanisms of the increase in local government debt in China. It also provides a theoretical foundation and empirical evidence for properly managing the relationship between public service provision and debt expansion within the context of fiscal imbalance. The findings help accelerate economic development while ensuring fiscal sustainability.