Countermeasures To Prevent Government Debt Crisis

Sovereign debt crisis is a recurring historical phenomenon. Yet the qualitative change from debt to crisis needs various conditions. From the fiscal perspective, due to the rigidity of expenditure expansion and mismatch between expenditure and income, fiscal activity itself has inherent nature of debt crisis. The direct factors leading to the crisis include:fiscal factors such as loose discipline or policy mistake; inner-sourced financing factors such as underdeveloped domestic bond market or abnormally high financing rate; outer-sourced financing factors such as accumulating lag of current item deficit or fragility of capital item; currency value disturbing factors such as high inflation or depreciation, etc. In addition, international capital flow becomes important triggering and infecting factors of debt crisis.In essence, sovereign debt crisis is an expression of economic crisis. As fiscal expenditure and income are part of social economic operation, sovereign debt becomes reflection of outstanding contradiction between social supply and demand. When the imbalance between supply and demand is so high that the imbalance of fiscal activities exceeds the economic tolerance, debt crisis emerges. Sovereign debt crisis also means the government's failure to mitigate the economic crisis, i.e. failure to mitigate the gap between socialized mass production and relatively low effective demand, or worse, intensifying the basic contradiction. Nevertheless, the process from debt to crisis takes time, and globalization provides the possibility to contain the sovereign debt crisis, thus debt crisis is still controllable.Regarding to China, sovereign debt is still sustainable, but the pressure and risks involved have grown greater. There exist a great number of institutional factors, leading debt problem to be lasting and implicit. If not well tackled, risks can be accumulating and will burst into crisis. These factors include but not limited to: government behavior and micro-base governance needs to be improved; fiscal arrangement between central government and local governments needs to be harmonized; fiscal democracy and ruling by law needs to be strengthened; social and economic operation environment is evolving in the reform process, with intensifying external uncertainty, etc.Based on the analysis of debt-to-crisis transformation conditions, dialectical outlook on sovereign debt must be established, which contains:positive outlook on debt; responsible outlook on debt; development outlook on debt; comprehensive outlook on debt.Dialectical outlook on debt demands improving fiscal governance, i.e. to establish institutions and mechanisms focusing on containing moral hazard; to strengthen supervision and constraint on budget implantation with budget democracy as high priority:to harmonize the fiscal relations between governments at various levels with tax-sharing system improvement as high priority; to strengthen fiscal risk monitoring and valuation system with mid-term fiscal planning as high priority.For fiscal policy, the government should develop "lean" expenditure policy to tackle the expenditure expansion, "smart" expenditure policy to maximum multiplying effect; maintain the pro-growth revenue policy and productive debt-utilization policy. In particular, to solve the contradiction between local expenditure expansion and local fiscal distress, the central government should persist in two-track method to strengthen incentive and constraint, and make innovative breakthrough in institutions such as reforming tax-sharing system, toughening local debt management, entitling local government to municipal bond issuance with conditions, mitigating debt of local financing platform, improving governance of local financial entities.Sovereign debt issue is not only relevant to fiscal policy but needs the coordination of other macro-policies. As for monetary policy, lasting low interest rate and abrupt rate hike should be avoided, the combination of floating rate with limited capital control should be maintained, and RMB internalization should be promoted in company with steady opening-up of domestic bond market. Prudential shifted trade policy should be taken to reduce the dependence on trade surplus, and proactive consumption policy should be encouraged to expand rational, secure and green consumption. As for financial market policy, Chinese government should further strengthen the Treasury bond market as underlying financial market, improve the soundness of the banking system, and balance the development of corporate bond market and equity market, and increasingly participant in globalization as well.