Abstract: The reform of the budget system is an important part of the public finance modernization. The problem of the local budget executive contraction comprehensively reflects the insufficiency of government’s budget management ability and macro-control ability. Based on the typical facts of Chinese fiscal decentralization, this paper makes use of the inter provincial panel data from 1997 to 2020 in China to conduct an empirical analysis on the multiple mechanisms and the impact effects of vertical fiscal imbalance and public expenditure bias on local budget executive contraction. The results show that the direct effect of vertical fiscal imbalance will aggravate the local budget executive contraction, but the local budget executive contraction can be alleviated indirectly through the people’s livelihood public expenditure bias. The heterogeneity analysis reveals that the bias towards livelihood expenditures in developed regions has deepened the local budget executive contraction, while theunemployment rates and economic development levels in developed regions can alleviate the local budget executive contraction. The mechanism analysis reveals that the vertical fiscal imbalance has generally aggravated the local budget executive contraction, and the irrational financial structure of central and local governments has deepened the local budget executive contraction. Therefore, in order to alleviate the local budget executive contraction, it is necessary to control the degree of vertical fiscal imbalance and adjust the distribution of fiscal power and administrative power between the central and local governments; optimize the structure of local government expenditure structure and increase the proportion of livelihood expenditure; further promote the reform of the modern budget system, alleviate the local budget executive contraction, and implement the key details of the budget system.

Key words: vertical fiscal imbalance, public expenditure bias, local budget executive contraction, modern budget system