The Impact of Fiscal Policy Uncertainty on Fiscal Sustainability—Based on China’s Empirical Data

Abstract

Fiscal policy uncertainty refers to unpredictability in government taxation and spending decisions, affecting economic planning, investment, and consumer behavior, leading to market volatility and potential economic slowdowns. In this research, we intend to analyze the impact of uncertain fiscal policies on fiscal sustainability in China, utilizing empirical data. We aim to elucidate how fluctuations in government expenses, budget uncertainties, and tax collection affect fiscal sustainability, with potential mitigating effects explored through financial sector development indicators. This study employs Panel Vector Auto regression (PVAR) to analyze the association between uncertain fiscal policies and fiscal sustainability in China. PVAR facilitates the examination of dynamic interactions among variables across multiple time series and cross-sectional units. This investigation demonstrates that fiscal policy uncertainty resulting from government expenses, budget uncertainties, and tax collection has a significant negative influence on China's economic development. However, financial development measures such as the ratio of liquid expenses and loans to the business community have a moderating influence. These findings highlight the significance of improving the growth of the financial sector to mitigate the negative implications of unpredictable fiscal policy and encourage sustainable fiscal increases over a longer period.