The impact of fiscal centralization policies on education expenditure among Chinese local governments

In 1994, the education policy goal for the Chinese government was that the education expenditure as a share of GDP should be at least 4% of GDP. However, this educational policy goal has not been achieved until 2010. Another relevant social issue was related to teachers’ pay: there were 168 strike and protests occurred in almost every part of China from 2014 to 2015. In this article, we examine the impact of fiscal centralisation policies have on China’s educational spending and teachers’ salary. We use a county-level panel data for period of 2001 to 2005 and apply a quasi-experiment. This study finds evidence that fiscally-centralising policies, exemplified by the Corporate Income Tax Reform passed in 2002, are one of the determinants that lead to less education expenditures and subsequently affect teachers’ merit salary.