The Study Of Provincial Fiscal Expenditure Spillovers In China Based On A GVAR Model

With the continuous expansion of local government debt and the decline of fiscal revenue, local fiscal risk gradually shows up, becoming a major security problems to the stable operation of macro economy in china. In this case, the expenditure of local governments not only directly affect the size of local government debt, but also affect the conduction of local fiscal risk through the link of local governments’ expenditure. If there is an interactive fiscal expenditure expansion of different provinces, there is a growing risk of local fiscal risk. While the fiscal expenditure spillovers mainly reflects the link of local governments’ expenditure-the fiscal expenditure of a certain area is not only affected by the social and economic development in this area, by also affected by the fluctuation of fiscal expenditure of other area. Moreover, the practical operation result and academic research result both confirmed the existence of a positive provincial fiscal expenditure spillovers, suggesting that when the fiscal expenditure of other provinces expand, local government with fiscal difficulty may also enlarge their fiscal expenditure. Undoubtedly, this positive expenditure spillovers will increase local fiscal risk. Besides, with the municipal bonds being opened up, the selected provinces get more disposable income, then the resulting fiscal expenditure spillovers will become stronger. Under this background, it’s significant for fiscal risk controlling to analyze the features of provincial fiscal expenditure spillovers and explore the interactive fiscal spending decision-making mechanism of local governments and discuss the effects of local governments’ expenditure.This paper combed the existent academic achievement for the empirical results and causes of local fiscal expenditure spillovers, and found that fiscal spending decision, battle for resource flowing, downward yardstick competition and fiscal constraints are the internal factors together determining the direction of fiscal expenditure spillovers. Besides, tax competition and the vertical connections with central government budget are also supposed to be the possible causes of expenditure spillovers. According to this theoretical model, this paper selected the fiscal expenditure and related economic variables of28regions in China from1985-2012as the research object, then added economic output, taxes, population and capital investment as endogenous variables for a certain province, and constructed the spatial lagged fiscal expenditure as the exogenous variable for a certain province by using GDP-based weights, thereby constructing a provincial fiscal expenditure determining GVAR model. Using GIRFs in this model, this paper investigated a various dynamic expenditure spillover shapes among different provinces and the mechanism behind these shapes. Main conclusions of this study are as follows:Firstly, all aiming at GDP race, local governments tend to take a similar strategy-expanding expenditure to deal with the expenditure expansion of other provinces, which leads to a general positive expenditure spillover.Secondly, the unbalanced economic development and unequal resource distribution makes the reference province to fiscal expenditure focus on the east coast provinces and few inland provinces with frequent population movement, ultimately leading to a relatively weak partial difference among expenditure spillovers.Thirdly, interprovincial trade can promote regional industrial cooperation and reduce the repetitive construction, therefore avoiding unnecessary financial resources waste. Since Guangdong, Shandong, Xinjiang and Zhejiang are the most important supplies for other provinces in Chinese interregional input and output, the expenditure fluctuations of these provinces leads to a general negative expenditure spillover through the positive externality of interprovincial trade.Fourthly, because of the discrepancy on economic development, fiscal expenditure and marketization level between the eastern and western region, the governments in western provinces are more motivated to race to expand fiscal expenditure, leading to an asymmetry between main senders and recipients of fiscal expenditure spillover-the expenditure fluctuations of the eastern province have significant effects on that of other provinces, but not sensitive to the expenditure fluctuations of other provinces; While the expenditure fluctuations of the western province is just the opposite.Fifthly, affected by inter-regional population mobility, the expenditure fluctuations of provinces with the most frequent population flows make the strong and most common impact on other provinces.Sixthly, because of the similarity on economic development, resources endowment and economic structure among neighboring provinces, local government, driven by the downward yardstick competition, are more vulnerable to the effects of expenditure fluctuations of neighboring provinces. More remarkable, the northwest provinces with the weakest financial independence and the highest central transfer payments received a much stronger positive expenditure spillover among each other.The above features and causes of fiscal expenditure spillover would amplify the existent local fiscal risk, especially the risk of western region. Moreover, the negative effects of the expenditure expansion to the economic growth rate of other provinces is quite universal, indicating the fiscal expenditure competition among provincial governments would decrease the efficiency of regional resource allocation.Finally, to better guard local fiscal risk and promote a balanced regional economic development, this paper advanced some pertinent policy suggestions from four aspects:build a reasonable and comprehensive performance indicator system and an official mechanism of rewards and punishments so that the expenditure competition among local governments are weakened; adjust the transfer payment system from central government, and pay more attention to the local fiscal risk of the western region; prudentially choose trial province and promote the municipal bonds issue step by step; strengthen support for interprovincial trade and cut costs of interprovincial trade.