Based on panel data covering the period from 2000 to 2014 in China’s 31 provinces, we introduce spatial weight matrixes that reflect regional similarity into the dynamic spatial panel model, thus empirically testing the influence of government expenditure scale and structure (government investment expenditure, government welfare expenditure and government consumption expenditure) on upgrading of the industrial structure. The research results reveal that upgrading of the industrial structure is characterized by spatial heterogeneity and dynamic adjustability. With respect to government expenditure aggregate, the increasing overall government expenditure can positively influence upgrading of the industrial structure but in an insignificant way; structurally, the government investment expenditure and welfare expenditure are significantly conducive to upgrading of the industrial structure while the government consumption expenditure has an inhibiting effect on upgrading of the industrial structure.