Fiscal Decentralization,the Expansion And The Sustainability Of Local Government Debt

The influence of government borrowing to social economy has been one of the key problems of economics research.In 2009,the European sovereign debt crisis broke out,and Local government debt has been pushed to the forefront of economic research.Nowadays,problems derived from local government debt is very difficult to deal with.How to prevent the local government debt ballooning,how to resolve high local government debt,such problems has become the contemporary problems which economists and policy makers pay close attention to.In China,with the rapid rise of leverage and an increasing debt risk of the whole society in recent years,more and more experts and scholars pay attention to the issues that the scale of local government debt expands unceasingly.Their research tends to blame on the imperfect of the fiscal decentralization system,the appraisal system of local government officials and local government debt management system.But these reason fails to explain why local government debt would appear to expand,and even cause severe debt crisis in the countries like the United States and Western Europe countries which has a sound system.Are there deeper reasons about the expansion of local government debt?In an economic society,local government borrowing behavior is not a random behavior.The size of its debt is not only related to the regional economic development level,but also related to the national financial system,including the system of transfer payments.So from the following aspects,this article emphatically discussed which specific factors would influence the expansion of local government debt.On this basis,the article put forward that the rational standards of local government borrowing should be the sustainability of local government debt.First,the article comprehensively analyzes the development and the present situation of China's local government debt.After reform and opening up,the constant expansion of the local government financial autonomy drives the constant expansion of its debt scale.With the deepening of the reform and development of the economy,local government gradually facing the disposable financial resources shortage problem.Faced with this dilemma,local governments began to adopt the way of bypass system obstacle and borrowing.It is important to note that the scale of local government debt,the structure of debtor,the financing source and the spending are consistent with regional economic development level.So we have to consider the local economic development level and economic structure when studying the dynamics of local government debt.Second,this paper discusses the analysis framework of local government debt based on local government public finance theory,and estimate the scale of China's local government debt.When choosing the financing model,local government must consider three problems:Fiscal sustainability,Redistribution and Resource allocation.So in this paper,the analysis of the local government borrowing behavior is also start from these three aspects,discuss the mutual relationship of local government debt,regional economic growth and fiscal decentralization system,and give a criterion of Local government debt sustainability.Due to a serious shortage of China's local government debt data,this paper estimates the size of the China's local government debt,and start the following discussions on these data.Third,the article establishes production function with the local government spending,and find that if the output increase driven by local government spending increases is greater than the tax cost,with the economic growth,local government debt shows the tendency of passive accelerated expansion.Through China's provincial panel data from 1997-2014,the article use panel vector auto-regression method to solve the endogenous problem in the traditional model,during the measurement test.The result shows that in the case of fixed other inputs,local governments usually promote economic growth through productive expenditure,especially in economic less-developed region.As long as there is local government productive expenditure,local government borrowing will effect on economic growth.In the case of other variables are unchanged,economic growth can also lead to the increase of local government debt.This is inevitable as local government keeps pursuing economic growth.Fourth,this paper explains the expansion of local government debt under the game equilibrium between central and local governments by constructing a two times inter-temporal decision model,and find out that Soft budget constraint is endogenous in the game model.Under this condition,local government has the impulse to expand the scale of borrowing.So local government debt is endogenous in the game of the central government and local government.Because the externality of local government debt is negatively,this will cause the loss of social welfare.The central government can prompt efficiency of the local government borrowing by reasonable penal policy,and lessen social welfare loss.Fifth,this paper discusses the accumulated path and sustainability of local government debt.Debt sustainability research used to mainly about the central government.According to the characteristics of the local government,the article finds accumulation path of local government debt by using the budget constraint conditions to derive the debt sustainable boundary.When local government debt scale is equal to its present value of expected future budget surplus and transfer payment,the debt size is considered to be sustainable.Through the analysis of China's local government debt data from 1998 to 2014,local government debt is unsustainable.From the region level,in eastern and central regions,local government debt is sustainable;in western region,local government debt is unsustainable.In 31 provinces,there are 14 provinces which local government debt is unsustainable.This will be a challenge for central government when making fiscal transfer payment policy.