Abstract: Nowadays, the attention of the people is more and more directed to the potential problems in the process of expanding public expenditure in the countries all over the world, especially in the context of fiscal crisis in some European countries. Therefore, it is very important to study the problem of how to decrease the public expenditure while adjusting the scale of social welfare. Based on the panel data studies of China’s provincial governments, the result of this paper shows that urbanization has positive effect on the expansion of local public expenditures while public needs of education have significant scale effect of economy. On the basis of the results of the empirical analysis, it is suggested that China’s local governments should optimize the structure of fiscal expenditure, strengthen the expenditure management, and carry out the reform in accordance with the policy of both increase and decrease public expenditures but more decrease than increase.

Key words: local public expenditure; scale of public expenditure; expansion effect; scale effect of economy; optimizing the expenditure structure