Fiscal Decentralization,Soft Budget Constraints And Local Government Debt Risk

The outbreak of the European debt crisis has brought great impact on the world economy since 2009.Especially for countries that develop their economies mainly through fiscal deficits,there have been long-term economic stagnation or even economic regression.The negative effects of this deficit economic model,which once brought prosperity to the developed countries in Europe and America,have emerged,and we have to re-examine the government's debt problem with caution.From our point of view,the reform of tax distribution system in 1994 determined the financial expenditure scope of the central and local governments.The problem of mismatch of financial rights and powers is becoming more and more prominent.It is not uncommon for local governments to compensate for the lack of financial resources by borrowing money.In 2008,the central government put forward the "four trillion" economic stimulus plan.While the economy has improved,the debt scale has also witnessed blowout growth.According to the National Government Debt Audit Report issued by the State Audit Office in 2014,the debt of local governments that are liable for repayment has exceeded the 10 trillion yuan mark,and the debt growth rate has also increased sharply,exceeding 60% compared with the previous period.With the rapid expansion of debt scale,Moody's International and Standard & Poor's downgraded China's sovereign credit rating in 2016,one of the reasons is the growing debt problem of local governments in China.Therefore,it has become an urgent problem to firmly establish risk awareness,strengthenlocal government debt risk management,prevent local government financial risk concentration and reduce the central government's bottom risk.Fortunately,with the appointment of the 18 th central leadership group,the debt problem of local governments has received unprecedented attention,and has been included in the daily work of the government,which has become an important issue affecting the overall situation.The Decision on Several Major Issues of Comprehensive Deepening Reform issued by the Third Plenary Session of the 18 th Central Committee,the Opinions on Strengthening Local Government Debt Management issued by the State Council and the implementation of the new Budget Law are all the best proof for the central government to strengthen local government debt risk management.Indeed,thanks to the repeated administration of the central government,local government debt risk has been restrained to a certain extent.However,due to the lag of the legal system,the "hidden channel" of disguised local government debt still exists.The risks brought by hidden debt may occur at any time,and the prevention and control of local government debt risks still have a long way to go.Based on the above historical background,it is very important to strengthen the study of local government debt risk.On the basis of explaining the relevant theory of local government debt,this paper empirically tests the impact of fiscal decentralization,soft budget constraints and promotion incentives on local government debt risk by analyzing the causes of local government debt risk,and finds out the restraint mechanism that leads to the increase of debt risk,so as to provide practical reference for the governance of local government debt risk.Specifically,based on the panel data of 30 provincial governments in China from 2008 to2016,we have three main findings:First of all,by testing the relationship among fiscal decentralization,audit supervision and local government debt risk,we find that fiscal decentralization is positively correlated with local government debt risk;audit supervision is negatively correlated with local government debt risk;the positive impact of fiscal decentralization on local government debt risk is constrained by audit supervision,that is,audit supervision has a negative moderating effect on the relationship between fiscal decentralization and local government debt risk.In further research,we have found that increasing audit investment in high-risk areas and enhancing audit accountability in low-risk areas are more conducive to reducing local government debt risk.Then,by testing the relationship among soft budget constraints,fiscal transparency and local government debt risk,we find that the degree of soft budget constraint is positively correlated with local government debt risk;fiscal transparency is negatively correlated with local government debt risk;and the positive impact of soft budget constraint on local government debt risk is constrained by fiscal transparency,that is,fiscal transparency has a negative moderating effect on the relationship between soft budget constraint and local government debt risk.Finally,We examine the impact of promotion incentives on local government debt risk.Unlike the existing literature,we find that there is a threshold effect between promotion incentive and local government debt risk.When it is below a threshold,it shows a negative correlation,and when it is above a threshold,the result is the opposite..Compared with the previous studies,our main contributions are as follows:Firstly,the hypothesis of "immune system function" of government audit is verified.We find that audit supervision has a negative moderating effect on the relationship between fiscal decentralization and local government debt risk,and has a significant role in debt risk management.It verifies the hypothesis of "immune system function" of government audit put forward by Liu Jiayi(2008).It provides useful enlightenment for establishing the position of national audit in local government debt risk management.Secondly,it tests the feasibility of fiscal transparency in the governance of local government debt risk in China.We find that fiscal transparency has a negative moderating effect on the relationship between soft budget constraints and local government debt risk.It shows that the improvement of fiscal transparency makes local governments publish more government information,and some soft constraints which are not easy to detect may be exposed,thus alleviating the information asymmetry between central and local governments and reducing the debt risk that may arise.This conclusion verifies the applicability and positive role of fiscal transparency in China,and provides literature support for the International Monetary Fund(IMF),the Organisation for Economic Cooperation and Development(OECD),Chinese governments at all levels and all sectors of society to vigorously promote the construction of fiscal transparency.Thirdly,the relevant literature in the field of promotion incentives is added.Different from the findings of Pudanlin and Wang Shanping(2014),Chen Jing and Li Jianfa(2015),itis believed that promotion incentives are positively related to the debt scale or debt risk of local governments.The results of this study provide a more detailed discovery,that is,promotion incentives and local government debt risk have a certain threshold effect,when lower than a certain threshold,it shows a negative correlation,when more than a certain threshold,it shows a positive correlation.This conclusion provides a new thinking for improving promotion incentive system and strengthening local government debt risk management.