Economic growth target, distortion of public expenditure and business cycle in China

In this study, we provide empirical evidence on the incentive role of official promotion from the perspective of managing economic growth targets. Using a manual dataset of economic growth targets in 230 Chinese cities during 2003-2016, we find that economic growth targets of governments curb public service expenditure on education, science and technology and this distortion results in the stagnation of human capital and technological progress, constraining long-term economic growth. When the growth target size of cities exceeds that of higher-level governments or if governments overfulfill their growth target tasks, then public service expenditure will decrease. We interpret the empirical findings as evidence that promotion evaluation based on economic performance distorts the composition of public expenditure, hinders sustainable economic development, and even accelerates the start of an economic downturn. Our study adds significant evidence to the theoretical literature emphasizing that the official evaluation system and public service could affect business cycle.