Existing literature suggests that agricultural fiscal expenditure narrows the urban–rural income gap by promoting agriculture-biased growth. This paper aims to reveal that non-agricultural growth also serves as a mechanism through which such expenditure narrows the gap. Furthermore, it seeks to explore a pathway of agricultural fiscal policies that narrows the gap more effectively by balancing the mechanisms of growth in both sectors.
This paper first builds a conceptual framework that reveals mechanisms of agricultural and non-agricultural growth through which agricultural fiscal expenditure impacts the urban–rural income gap. The framework distinguishes between two components of agricultural fiscal expenditure: agricultural producer subsidies, biased toward agricultural growth and general rural support, promoting both agricultural and non-agricultural growth. Second, using China’s provincial panel data, we employ a two-way fixed effects model to estimate the effects of agricultural fiscal expenditure on growth in each sector, and subsequently, how these growth effects influence the gap. We also estimate the heterogeneity of these effects when the structure of agricultural fiscal expenditure changes.
This paper finds that a one-percentage-point increase in the share of agricultural fiscal expenditure over total fiscal expenditure raises China’s agricultural labor productivity and number of rural residents employed in non-agricultural sector by 0.010% and 0.016%, respectively. Growth in agricultural labor productivity and number of rural residents employed in non-agricultural sector further narrows the urban–rural income gap. Agricultural producer subsidies only promote the growth in agricultural sector, whereas general rural support stimulates the growth in both sectors. Increasing the ratio of general rural support over agricultural producer subsidies narrows the gap more effectively.
First, while literature emphasizes that agricultural fiscal expenditure narrows China’s urban–rural income gap through its pro-growth effect on agriculture, this paper presents novel evidence that its pro-growth effect on non-agricultural sector also narrows the gap. It thus enhances the understanding of how agricultural fiscal expenditure reduces China’s urban–rural income gap. Second, while literature focuses on narrowing the gap by increasing agricultural fiscal expenditure share, this paper argues that increasing the share of general rural support within total agricultural fiscal expenditure can promote both agricultural and non-agricultural growth more effectively, thereby leading to a larger reduction in the urban–rural income gap. This suggests that further raising the general rural support share can more effectively narrow the urban–rural income gap.
