Bridging the Divide: How Can a Virtuous Cycle of Fiscal and Financial Alleviate Urban–Rural Income Inequality?

Promoting a virtuous synergy between fiscal and financial systems serves as a pivotal policy instrument for dismantling the urban–rural dual structure and advancing common prosperity. Utilizing panel data from 277 Chinese prefecture-level cities (2011–2023), this study constructs a coupling coordination degree model to systematically gauge the level of fiscal–financial interaction. It then conducts an in-depth assessment of how this synergy impacts the urban–rural income disparity, focusing on its mechanisms, nonlinear traits, and spatial effects. The empirical validation yields four principal findings: (1) Fiscal–financial synergy significantly narrows the urban–rural income gap, a conclusion robust to a battery of tests for endogeneity and alternative specifications. (2) Mechanism analysis reveals that this convergence is driven by four channels: industrial structure upgrading effects, entrepreneurial incentives, enhanced social welfare, and clean governance effects. (3) Heterogeneity analysis indicates that the gap-narrowing effect is markedly stronger in non-central cities, areas with lower urbanization rates, weaker fiscal transparency, and less-developed markets. This exhibits pronounced inclusivity and a distinct “shortfall-remedying” characteristic. (4) Nonlinear and spatial examinations uncover a significant threshold effect: crossing a specific threshold triggers a marginal increasing effect on convergence. Furthermore, the policy generates positive spatial spillovers to adjacent regions through factor mobility. By adopting a fiscal–financial co-governance perspective, this paper enriches the empirical evidence on income inequality mitigation and offers vital policy insights for optimizing cross-departmental policy mixes and deepening urban–rural integration.