Spatial and nonlinear effects of local government debt on environmental pollution: Evidence from China

Abstract

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As a way for the government to integrate funds and make up for fiscal deficits, bond issuance plays an important role in environmental governance and thus impacts environmental quality. Based on the panel data of 30 provinces in China from 2011 to 2019, this study utilizes spatial econometric and threshold panel models to investigate the influence of local government debt on environmental pollution. The empirical results are as follows: 1) Both environmental pollution and local government debt have a significant positive spatial agglomeration effect. 2) The relationship between local government debt and environmental pollution presents a nonlinear U-shaped curve. Specifically, when the debt scale is less than the threshold value, local government debt plays a role in restraining environmental pollution, and when the debt scale exceeds the threshold value, the influence of local government debt on environmental pollution plays a promoting role. 3) A regional heterogeneity test suggests that in the eastern region, the influence of local government debt on environmental pollution is always restraining, while in the central and western regions, this influence is consistent with the national level, showing a U-shaped feature. This study provides a reference for policy-makers in improving environmental quality from the perspective of local government debt. Policy-makers should keep the scale of government debt within a moderate range to avoid the deterioration of environmental quality caused by excessive debt.

Keywords

• local government debt
• environmental pollution
• spatial effect
• nonlinear effect
• China