The Underlying Logic Of Transfer Payment And The Status Of Prefecture-level Government

Transfer payment is a very important perspective in the study of relationship between centraland local government. China established the transfer payment system as soon as the reform of taxallocation in1994. After that, the total amount of transfer payment increased at a rate of more than20%per year. Meanwhile, lots of problems were exposed during the process of allocating capital.This paper aims to figure out the original logic of the transfer payment in the perspective of politics,and accordingly, provides the analysis of reasonable causes and solutions.The transfer payment system in China is established in the background of the huge gap betweenfiscal revenue and expenditure for local government, which brought by the reform of tax allocation.The underlying logic lies in three aspects: maintaining the “political authority” through fiscal controland cadre appointment; realizing certain policy targets through the remarked transfer payment; and,control the risk of agent by the specific use of capital in remarked transfer payment. The logic abovenot only result in a mismatch of the right of revenue and the responsibility of expenditure, but alsoresult in a non-cooperating relationship between the upper level and lower level government, thuscreating a self-benefiting preference for the local government. Besides that, there are also otherinstitutional problems contributing to the problems occurred in transfer payment; such as,insufficiency of rules about transfer payment, the weakness of supervision in fiscal andadministrative area. Up to now, most of the researches are based on one the above perspectives,instead of clarifying from a original perspective and explaining with a comprehensive framework, tofigure out the causes of all the problems in transfer payment.Among all levels of governments, the problems in the prefecture-level government stand out. Itis because the status as a “transferer” of prefecture-level government, which provides greatconvenience to obtain fiscal benefit that belongs to the county government. The reform of“provincial directly governing county” is an effective way to solve the problems but can also doharm to the fiscal capacity of prefecture government.Facing the trend of a heavy control in “landing fiscal” and “quasi-government debt”, theprefecture-level governments have to deal with the fiscal insufficiency in the future and will bedifficult in fulfilling the function, if the transfer payment does not provide reasonable support to thislevel.