The Impact Of Land Finance On Local Government Fiscal Risks

From the perspective of the real estate industry, both the Asian financial crisis and the U.S. sub-prime mortgage crisis have revealed serious financial instability and economic recession caused by local government fiscal risks. For the double identities of local governments as economic and public agents, local governments not only have to face direct and contingent risks, but also explicit and implicit risks. Furthermore, the uncertainty of fiscal risks divides into the uncertainty of public resources and expenditure of responsibilities and obligations. After the taxing system reform in 1994, the asymmetry of local governments'fiscal authority and performance authority increases local government fiscal risks. With the monopoly power in the allocation of land transferring revenues system, local governments create land finance to compensate for their fiscal deficiency. The main forms of land finance are land transferring fees and real estate taxes. In the recent hot real estate market, more and more attention is paid to the close link among land transferring fees, real estate taxes and real estate prices. Extraordinary development of the real estate industry leads to the unsustainability of local governments'land finance, resulting in the increasing of local government fiscal risks. Therefore, to reduce the unhealthy impact of local governments'land finance, we must reform the financial system, land transferring system and real estate taxing system.This article can be divided into four parts as follows.Part 1:Basic introduction to domestic and foreign fiscal risks theories. The fiscal risks matrix introduced by Hana Polackova Brixi divides fiscal risks into four kinds, named as direct risks, contingent risks, explicit risks and implicit risks. This enlarges the view of government debt, and reflects the condition of government debt more comprehensive. But it only stands on the point of debt. By analyzing the double identities of local governments as economic and public agents and the uncertainty of fiscal risks, Doctor ShangxiLiu focuses on the uncertainty of public resources which mainly performs as the unsustainability of local governments'revenues. By analyzing some fiscal risks indexes, we can see that fiscal risks in our government have an increasing trend.Part 2:Discuss local government fiscal risks in detail and study the causes of them. By analyzing our local government fiscal risks matrix, contingent and implicit risks will increase local government fiscal risks in the long term. With the comparison of local government fiscal risks indexes in different areas, most local governments have serious fiscal risks which are related to local economic growth. With the comparison of Shanghai's fiscal risks indexes from 1995 to 2008, the ratio of tax revenues in total finance revenues is decreasing while finance revenues are increasing. In the recent hot real estate market, this abnormal growth from land transferring fees and other fees is unsustainable. In the end, the paper discusses the drawbacks of the financial system and land transferring system which are the fundamental causes of land finance.Part 3:Deeply analyze the unhealthy impact of local governments'land finance on local government fiscal risks from four parts of land finance revenues. Mainly focusing on land transferring fees and real estate taxes, the paper reveals the problem existing in land finance. By analysis of the correlation of the growth ratio of fiscal deficiency, land transferring fees and GDP, we find there are close links between real estate prices and local government fiscal risks. Because of a certain degree of bubble in recent real estate market, the least 1800 million acres farmland in the provision of "farmland red line" and the automatically renewal right of using land in the provision of "Property Law", land finance revenues relied on land and its affiliated real estate are not sustainable.Part 4:Give recommendations to reduce the unhealthy impact of local governments'land finance on local government fiscal risks. The core of reforming the financial system is establishing a harmony financial system in which local governments'fiscal authority matches their performance authority. So, local governments with sufficient financial revenues can provide adequate public goods and services. The core of reforming the land transferring system is establishing a fair distribution system of land profits among local governments, organizations and peasantries. With the high-speed development of China's real estate industry, the core of reforming the real estate taxing system is the introduction of property tax which can not only increase local governments'revenues, but also standardize land finance revenues. Through the three ways above, we can reduce the unhealthy impact of local governments'land finance on local government fiscal risks to a certain extent.