Local Government Debt, Financial Circle, and Sustainable Economic Development

ABSTRACT

Local government debt is the biggest “gray rhino” of China’s economy and one of the most significant factors affecting the sustainability of economic growth. We use the macroeconomic data of China’s real economy development level and local government debt from 2000 to 2020 to investigate the impact of local government debt on the real economy using the spatial Durbin model, focusing on the impact of the local government debt scale on the development of the real economy in jurisdictions and non-jurisdictions and the intermediation effect of finance under the geospatial correlation characteristics of economic development. The results show that the spatial correlation of the real economy between jurisdictions prevails and the correlation deepens over time. The scale of local government debt in China has exceeded a reasonable threshold, and the crowding-out effect of debt expansion on the real economy is obvious and not limited by jurisdictions, with significant spatial spillover effects. Financial marketization can effectively mitigate the crowding-out effect of local government debt on the real economy. These findings provide useful references for mapping the correlated development characteristics of local government debt and the real economy in China, effectively preventing local government debt risks and high leverage of the real economy and financial systemic risks, and providing effective insights for other countries to resolve government debt problems, prevent crises, and promote local economic development.