Abstract: In recent years, local governments are faced with fiscal deterioration, while the transfer payment of the central government has further led to inefficient public expenditures. This paper makes use of the panel data of China’s 29 provinces during the period of 1996-2015 to conduct an analysis. The findings show that soft budget constraints have indeed reduced the financial efforts of the local governments to a certain extent. Especially before the new Budget Law, the local governments would expand their expenditures due to the excess revenue, which could seriously reduce the local financial efforts. The amendment of the Budget Law provides a clearer and fairer calculation method for the collection and distribution of tax money, which can reduce the inducement on the local governments to increase public expenditure by striving for funds from the central government, thus relieving soft budget constraint problem to a certain degree. Therefore, it is suggested that we should carry out and implement thoroughly the new Budget Law, give full play to the market mechanism, take advantage of the competition supported by the society and the capital market disciplines to enhance the hard budget constraints, remove the overlapping responsibilities between governments, and carry out strict classified control on local government expenditures and debts.

Key words: soft budget constraints; financial efforts; local finance; local government