Abstract:Differences in the fiscal resources of local governments determine differences in the supply of basic public services in regions. As an important means of balancing local fiscal resources, fiscal transfer payment can promote the equalization of the supply of basic public services through its differentiated impact on local government financial expenditure. Fiscal pressure and pressure for economic growth are important factors influencing the fiscal spending behavior of local governments. However, the existing literature seldom considers the influence of this dual pressure when exploring the public service supply effect of transfer payment. This paper argues that the increased financial resources brought about by transfer payments will encourage local governments to increase their fiscal spending on basic public services, thereby increasing the supply of regional basic public services; the mismatch between fiscal power and office power caused by fiscal decentralization puts local governments under the pressure of vertical fiscal imbalance, while the relative lag in economic development puts pressure on local governments to catch up. These two pressures prompt local governments to allocate more financial resources to economic construction areas that are more conducive to revenue growth and economic development, which in turn has a dampening effect on the supply of basic public services in regions. An empirical analysis of a sample of 237 prefectural-level cities in 16 provinces, autonomous regions, and municipalities confirms the above view. The per capita transfer payments received by local governments are significantly and positively correlated with per capita fiscal expenditure on basic public services (including education expenditure, health expenditure, and social security expenditure), while the fiscal vertical imbalance pressure and economic catch-up pressure faced by local governments are significantly and negatively correlated with per capita fiscal expenditure on basic public services. Further analysis of the threshold effect and moderating effect shows that the incentive effect of basic public service supply in fiscal transfer has a threshold effect of fiscal vertical imbalance pressure and economic catch-up pressure, manifested as the incentive effect gradually weakens as the pressure increases. The increase in the scale of transfer payments can weaken the negative impact of the pressure of vertical fiscal imbalance on the supply of basic public services in regions, but the moderating effect of the increase in the scale of transfer payments on the negative effect of economic catch-up pressure is not significant. This suggests that transfer payments can directly and significantly alleviate the pressure of vertical fiscal imbalance, while the effect on economic catch-up pressure is more indirect and may not be significant. Compared with the existing literature, in this paper, the impact of the pressure of vertical fiscal imbalance and the pressure of economic catch-up on the supply of basic public services in regions and the moderating role of transfer payments are analyzed, and the heterogeneity of transfer payments in stimulating the supply of basic public services under different pressures is examined. This study contributes to an in-depth understanding of the incentive mechanism of transfer payments for the supply of public products. Moreover, the empirical analysis using prefecture-level cities as a sample can provide useful insights for improving the sub-provincial fiscal transfer system and promoting the equalization of regional public services. Based on the conclusions of this study, it is necessary to improve the allocation mechanism of fiscal transfer funds to effectively promote the equalization of public services, to establish and improve a fiscal and tax system that integrates the powers of provincial and lower level governments to alleviate the vertical fiscal imbalance pressure of local governments, and to deepen the reform of the performance evaluation and assessment mechanism of local governments to alleviate the economic growth pressure of local governments.