Government size, fiscal transparency, and the composition of public expenditure: Evidence from Chinese prefecture-level cities

This study investigates how fiscal transparency moderates the relationship between local government size and the composition of public expenditure in Chinese prefecture-level cities. Using panel data from 283 cities between 2013 and 2022, the study employs a two-way fixed effects dynamic panel model estimated with the system GMM approach to address endogeneity and dynamic behavior. The results show that an increase in local government size is initially associated with a rise in productive expenditures, such as science and technology, and a decline in unproductive expenditures, including education, social security, and health care. However, fiscal transparency significantly moderates these effects. As transparency increases, the positive impact of government size on productive spending weakens, while the negative impact on unproductive spending also diminishes. These findings suggest that fiscal transparency plays a critical role in shaping how local governments allocate resources under fiscal pressure, by reducing information asymmetry and enhancing accountability. The study concludes that while larger governments may prioritize economic functions over social services, transparency can constrain such tendencies. Policymakers should therefore closely monitor government expansion and improve transparency mechanisms to ensure a balanced approach that supports both fiscal sustainability and public welfare.