This study examines the relationship between fiscal decentralization and economic growth in China since the late 1970s. It finds that higher fiscal decentralization is associated with lower provincial economic growth over the past fifteen years, contradicting the conventional belief that fiscal decentralization promotes local economic growth. The study uses provincial panel data from 1978–1992 to empirically test the impact of spending by different levels of government on economic growth. The analysis shows that budgetary spending became more decentralized since 1978, while extra-budgetary spending showed a decreasing local share during the entire reform period. The share of local consolidated spending fluctuated. Fiscal decentralization varied across provinces and over time. Empirical results indicate that fiscal decentralization, measured by the ratio of provincial budgetary spending to central budgetary spending, has a negative and significant effect on provincial economic growth. This finding is robust across different specifications of regression equations. The study also finds that central government spending on administration and development has a positive and significant impact on growth, while provincial government spending on administration and development has a negative and significant impact. The study concludes that fiscal decentralization in China has not led to a clear pattern of fiscal decentralization on the spending side. The findings suggest that fiscal decentralization may not always lead to economic growth, and that the merits of fiscal decentralization must be measured relative to the existing revenue and expenditure assignments and the stage of economic development. The central government may be in a better position to undertake public investment with nation-wide externalities in the early stages of economic development. Further decentralization may result in slower overall economic growth if local shares in total fiscal revenue and expenditure are already high.This study examines the relationship between fiscal decentralization and economic growth in China since the late 1970s. It finds that higher fiscal decentralization is associated with lower provincial economic growth over the past fifteen years, contradicting the conventional belief that fiscal decentralization promotes local economic growth. The study uses provincial panel data from 1978–1992 to empirically test the impact of spending by different levels of government on economic growth. The analysis shows that budgetary spending became more decentralized since 1978, while extra-budgetary spending showed a decreasing local share during the entire reform period. The share of local consolidated spending fluctuated. Fiscal decentralization varied across provinces and over time. Empirical results indicate that fiscal decentralization, measured by the ratio of provincial budgetary spending to central budgetary spending, has a negative and significant effect on provincial economic growth. This finding is robust across different specifications of regression equations. The study also finds that central government spending on administration and development has a positive and significant impact on growth, while provincial government spending on administration and development has a negative and significant impact. The study concludes that fiscal decentralization in China has not led to a clear pattern of fiscal decentralization on the spending side. The findings suggest that fiscal decentralization may not always lead to economic growth, and that the merits of fiscal decentralization must be measured relative to the existing revenue and expenditure assignments and the stage of economic development. The central government may be in a better position to undertake public investment with nation-wide externalities in the early stages of economic development. Further decentralization may result in slower overall economic growth if local shares in total fiscal revenue and expenditure are already high.