Local Government Spending and Economic Growth in Guangdong: The Key Role of Financial Development

Abstract

This paper investigates how financial development shapes the relation between local government spending and regional economic growth by applying the GMM technique on dynamic panels. Using panel data of 21 prefecture-level cities in Guangdong for the period 2000-2015 and after considering the financial development for each region, our findings show that local government spending and regional economic growth have a significantly positive relationship, which supports Wagner’s Law. However, the level of financial development may mitigate the positive relation between government spending and economic growth, but the impact of financial development is different for Pearl River Delta and non-Pearl River Delta.