The Research On Cause Of Chinese Local Fiscal Investment’s Soft Budget Constraint

Since reform and opening-up, China has made great effort to hard the state-owned enterprises’ budget constraint and improve their performance. At the same time, the soft budget constraint problem that also exists in local governments have been neglected more or less. In the context of implementing proactive fiscal policy, the local government made urban construction to expend the level of investment in the area under the jurisdiction, and promoted the growth of local economic and employment. Especially in the face of the global economic crisis, the local government investment played an important role once again. However, the existence of soft budget constraint made many local governments investment enthusiasm continue to rise, which lead to alienation of investment, such as repeated investment and the completion of the projects regardless of cost. This not only poses a financial risk to the local governments, but also places an enormous burden to the central government and seriously influences the construction of a good financial system. Therefore, it is need to conduct further analysis on local government investment at this stage, in order to gradually harden budget constraints and standardize local government investment.Making a comprehensive view of the reasons for the investment expansion of local government, we can find that the soft budget constraint impenetrates every factor. But, the present study about this only regards the soft budget constraint as the sole reason, which lacks of a comprehensive and systematic studying on the interrelation between them. This paper selected investment behavior of local government finances as its research object, analysis the problem under the theory of soft budget constraints and local government financial investment theory, and use the game theory as an analytical tool. Firstly, this paper gives a historical context of local governments’ financial investment behavior characteristics under the totalitarian system and decentralization system. Secondly, from the aspects of subjective motives and objective environment, to analyze why the local government want to break its investment budget, and discuss its inside game advantage under the present system and make a research of how the external institutional constraints which was missing or incomplete give local governments some convenience to break its budget constraints. Last but not the least, learn some relevant experience from abroad, proposed the use of reform and institutional innovation, to harden budget constraints local financial investment advice. According to the analysis of the subjective motives and objective institutional environment, this paper summed up the main reason for this phenomenon. Since performance evaluation mechanism is unreasonable and local governments have to undertake a lot of work under very limited fiscal budget, so the local officials have an inner impulse to breakthrough its investment budgets. And local government is in a dominant position when it’s gaming with various stakeholders. To make matters worse, the relevant constraint mechanism is not sound which create some operational space for the alienation of investment impulse. Therefore, we must take measures such as change local government functions, speed up the construction of the current financial organization’s relating systems, strengthen the budget constraint’s mechanism and establish a scientific performance evaluation system and monitoring system, so as to provide a favorable investment environment for the local governments and to standardize local government investment gradually.