Between "Stabilizing Growth" and "Safeguarding Livelihoods": How Fiscal Pressure Alters Local Financial Expenditure

With the dual objectives of stabilizing growth and safeguarding livelihoods, how local governments adjust fiscal expenditure structure under tightening budget constraints has become a central issue in China's fiscal governance. Incorporating regional heterogeneity, this study examines the adjustment mechanisms of local expenditure strategies under different types of fiscal pressure. Both theoretical derivations and empirical evidence show that, under fiscal pressure induced by changes in the economic environment, local governments tend to reduce productive expenditure, and the reduction is larger in regions with lower capital stock and lower pre-existing productive expenditure. The direction of changes in transfer expenditure is uncertain and may shift from increase to decrease as the capital stock rises. Under the fiscal pressure induced by policy and institutional changes, productive expenditure also contracts, and the contraction is greater in regions with larger capital stock and greater pre-existing productive expenditure. Meanwhile, cuts in transfer expenditure become more pronounced as the capital stock and resource endowments increase. Numerical simulations reproduce these heterogeneous adjustment paths within the theoretical framework, thereby strengthening the mechanism-based credibility of the empirical findings. As the fiscal pressure on local governments is likely to persist in the foreseeable future, this study provides an analytical framework for understanding local expenditure behavior under pressure-driven fiscal incentives and constraints.