This paper was published in the international academic journal Cities 126 (2022) 103699. The authors are Yan Yan from the School of Urban Economics and Public Administration at Capital University of Economics and Business, Liu Tao from the School of Urban and Environmental Sciences at Peking University, and Wang Ningcheng and Yao Shenjun from the School of Geographic Sciences at East China Normal University. This research was funded by the Peking University–Lincoln Center.
Political pressure refers to a local government's ability to use its revenue sources to meet its spending needs. Fiscal pressure has become a major challenge for local governments in many countries, especially industrialized and urbanized nations. There are various reasons for increased fiscal pressure on cities, such as erosion of the economic base, population decline, and a decrease in the tax base.
This study takes rapidly urbanizing China as a case study to explore the impact of urban sprawl on local government fiscal pressure and the underlying mechanisms, specifically answering three questions: First, is the sprawling urban growth model the reason for the recent increase in fiscal pressure in many Chinese cities? Second, if this association exists, what is the underlying mechanism behind its formation? Is it urban sprawl causing excessive spending, or is it failing to deliver the expected revenue? Third, is the impact of urban sprawl on local government fiscal pressure widespread or heterogeneous? For example, are there differences between developed and underdeveloped regions, large cities and small cities? Studying these questions helps to understand the correlation mechanism between urban development patterns and fiscal risks, and is also of practical significance for assessing the fiscal risks posed by the rapid and inefficient expansion commonly found in cities in China and other rapidly urbanizing developing countries.
To examine the impact of urban sprawl on local government fiscal pressure, this study constructs a mathematical model explaining the degree of urban fiscal pressure. The dependent variable is urban fiscal pressure, defined as (urban public fiscal expenditure - urban public fiscal revenue) / urban public fiscal revenue. This study constructs a structural indicator reflecting urban sprawl and further divides it into two models: one is urban sprawl, dominated by industrial park construction, characterized by industrial suburbanization and the spread of industries into low-density urban areas, resulting in slow population growth; The other is urban sprawl, led by the construction of new towns and new districts, manifested as suburbanization and population dispersion into low-density urban areas. The mechanisms by which the two spreading models affect urban fiscal pressure differ. This study focuses on 285 prefecture-level and above cities, covering the period from 2002 to 2017. Data sources include MGUP data, WorldPop global population density data, China City Statistical Yearbook, and China Land and Resources Statistical Yearbook.
The study found that, overall, urban sprawl is significantly positively correlated with the fiscal pressure on local governments. Different ways to distinguish urban sprawl found that residential sprawl significantly increases urban fiscal pressure, while industrial sprawl has little impact on urban fiscal pressure.
Urban sprawl, driven by new city development and residential suburbanization, mainly focuses on real estate development and attracting population. Since the vast majority of taxes in China are collected through enterprises, a "sleeping city" without industries cannot generate sustained fiscal revenue afterward, except for some tax revenue generated during the real estate development and construction phase. Urban sprawl, driven by industrial park development and industrial suburbanization, mainly focuses on attracting new industries. The development of suburban industries and tax base expansion can achieve a relative balance between fiscal revenue and expenditure.
The impact of urban sprawl on fiscal pressure shows heterogeneity among cities of different sizes and stages of development. In small cities with low development levels, attempts to supply suburban land cheaply and promote population and industrial clustering through spatial development strategies do not achieve the desired effect; urban sprawl will indeed seriously undermine the fiscal pressure on local governments. In economically developed large cities, suburban land development generally attracts large numbers of residents and businesses. Even with lower urban sprawl, it does not seriously damage urban financial pressure and enables sustainable urban development.
Based on the empirical results, the authors propose several policy recommendations. First, the long-standing expansion-driven urban development model should fundamentally shift to a compact and intensive development model, emphasizing two points in practice: on one hand, urban sprawl must be strictly controlled by systematic supervision through defining urban growth boundaries, protecting urban green spaces, and strengthening land use regulations; On the other hand, urban renewal in central districts is also an economically risky action and should prioritize economic sustainability. Second, the allocation system for land development quotas should be revised to reduce the risk of increasing local government debt. The current system disproportionately allocates large land development quotas to smaller, underdeveloped urban areas, leading to serious fiscal risks, large budget deficits, and unbearable local government debt. To reduce this risk, large cities in developed coastal areas should receive more land development quotas. Compared to the land quota allocation system, fiscal transfer payments and immigration support systems may be better options for achieving regional balanced development goals. Third, there is an urgent need to establish mechanisms for early warning and restraint of fiscal pressures to identify and regulate potential risks in urban development and construction investment. This mechanism will help detect excessive and unnecessary urban land development early and is an important solution for effectively managing fiscal risks during urban development.
Heterogeneity analysis allows us to glimpse the diversity and general trends in the relationship between urban sprawl and fiscal pressure. Given that urban sprawl has become an increasingly common phenomenon in urban spatial expansion worldwide, its harmful impact on fiscal pressure is noteworthy. This is especially critical for small and medium-sized cities in underdeveloped countries and regions, as their fiscal systems are small and vulnerable. Supported by our heterogeneity analysis results, optimistic scholars and policymakers can expect that the negative fiscal effects of urban sprawl may be alleviated as cities grow and regional development progresses. The positive fiscal effects observed in large cities in developed regions may even be reversed. However, for most cities in developing countries, a more likely consequence of urban sprawl is that fiscal pressures arrive earlier than the optimistic outcome anticipated. In this sense, urban sprawl as an urban development strategy should be approached with caution, as this study demonstrates that this development model carries significant financial risks.
Original source: Yan, Y., Liu, T., Wang, N., & Yao, S. (2022). Urban sprawl and fiscal stress: Evidence from urbanizing China. Cities, 126, 103699. https://doi.org/10.1016/j.cities.2022.103699
