Transfer Payment And Fiscal Expenditure Of Local Government

Since the reform of the tax system, the central government has taken back the financial power and released duties of public service, which caused unbalance of local government on financial power and duties. In order to make up the financial gap of local government, to realize the equalization of the basic public services between regions, the central government has increased transfer payment to the local government gradually. It effectively strengthened the macro-control function of central government and made up the financial gap between regions, ensured the effective supply of public service.As the important part of local government Financial income, transfer payment has a great influence on fiscal expenditure policy of local government. There exist differences between the effects because of the different financial expenditure. In China’s political system, promotion of local officials depends mainly on the higher levels governments. Economic performance is the most important evaluation index. Therefore, the local government has a strong incentive to put the fiscal expenditure on economic construction and ignore the human capital investment and the supply of basic public service. At the same time, the effects of transfer payment on financial expenditure also have regional differences. Because the financial capacity of middle and west regions is relatively insufficient compared with the eastern provinces, incentive effect of transfer payment on fiscal expenditure in these regions is more obvious. This article studied the influence of transfer payment on local government’s fiscal policy through theoretical and empirical model and tried to analyse distortion effect of promotion factors on fiscal expenditure behavior.This article is divided into five parts. The first part is introduction, which introduces the background and significance of the research and related literatures. The second part summarizes and analyses the characteristics of transfer payment and China’s fiscal expenditure of local government. The third part analyses the influence of transfer payment and promotion factors on fiscal expenditure behavior of local government by constructing a response function to transfer payment of selfless type and selfish type of local government. The fourth part tests the influence of transfer payment on fiscal expenditure structure of local government and analyses the distortion of officials’ promotion on fiscal expenditure behavior by Chinese provincial panel data. The fifth part of the paper makes a simple summary and gives some preliminary policy recommendations aims at the existence problem of our country’s transfer payment system and local government’s fiscal expenditure structure.