The Impact Of "Soft Budget Constraint" Reform Into "Hard Constraints" On Fiscal Risks

In the 40 years of reform and opening up,China has achieved rapid economic growth and development.However,in the process,there have also been many risk factors including debt surge,weak growth,structural imbalances,and overcapacity,which constitute a new era of construction.The main economic risks in the process of socialism with Chinese characteristics pose a serious challenge to the sustainable development of China's economy.An important aspect of economic risk is fiscal risk.In 2008,affected by the global financial crisis,China adopted a more proactive fiscal policy,and the issue of fiscal risk assessment and prevention was further put on the agenda.Fiscal risk is closely related to local debt risk,partly because the central government is able to cover the local government's fiscal gap in the modes of local debt before 2014.The problem of soft budget constraints has been formed,which has led to a series of local fiscal risks.How to resolve the fiscal,financial and social risks which caused by local debt has become an important issue that governments at all levels and theoretical circles must face.In May 2014,the State Council approved "self-repayment" pilot reform.in 10 regions including Shanghai,Zhejiang,Guangdong,Shenzhen,Jiangsu,Shandong,Beijing,Jiangxi,Ningxia and Qingdao.The biggest bright spot of this reform is that the central government no longer makes the final slogan for local government credit,which means that the local debt repayment has changed from the "soft budget constraint" to the "hard budget constraint".Therefore,we regard this pilot reform as a shift from "soft budget constraint" to "budget hard constraint",and study whether local government behavior changes after this reform can improve the growing local fiscal risks.This study theoretically compensates for the gaps in empirical research related to budget soft constraints,and provides certain policy recommendations based on local debt budget constraints and fiscal risk controlling,which has a strong practical significance.This paper mainly studies the impact of local debt "self-repayment" reform on local fiscal risks through the empirical methods of difference-in-difference and difference-in-difference-in-difference,and attempts to explore the impact mechanism and the influence differences of different city groups,then further exploring the behavior changes of local governments before and after the reform.The arrangement of this paper is as follows:Firstly,we conduct the benchmark regression,placebo test,and robustness test for the impact of local debt"self-repayment" reform on local fiscal risks.Next,a mechanism analysis will be conducted to explore the impact of local debt "self-repayment" reform on fiscal risks.Then,the heterogeneity analysis is carried out,and through the difference-in-difference-in-difference(DDD)empirical test,it is studied whether there is a difference in the impact of the policy on cities with different degrees of fiscal decentralization;then,we will study whether there are differences in the cities of different reform efforts,different economic levels,different administrative levels,and of different geographical locations.Finally,we will study the short-term and long-term effects of the reform,and examine the changes in local government financing methods before and after the local debt "self-repayment" reform.Through the above research,the paper draws the following conclusions:First,the "self-repayment" reform of local debt does have a significant inhibitory effect on local fiscal risks.After adding all the control variables,compared with the control group cities,the fiscal risk of the processing group cities is reduced by about 0.0127,and this result can pass a series of robustness tests.Second,the mechanism of the above-mentioned effect is that after the reform,local governments pay more attention to fiscal sustainability,adopt a more cautious attitude toward economic expenditures,and curb investment impulses,more debt financing funds will be invested to the people's livelihood,which will help prevent and control the fiscal risks caused by the original investment impulses.Third,the higher the degree of fiscal decentralization,the more effectively the policy reduce its fiscal risk;the greater reform of the city,the more effectively the reform reduce its fiscal risk;the reform will increase the local fiscal risk of cities with higher economic levels and reduce the local fiscal risks of cities with low and medium economic levels;the local fiscal risks of provincial capital and municipality will increase significantly,the local fiscal risks of other cities will decline after the reform;however,this policy does not have the effect of spatial heterogeneity.Fourth,when the central government restricts local government debt financing through "self-repayment",local governments reduce the scale of urban investment bonds from the financing platform;on the other hand,local governments will break through the existing constrain,and seek new channels to expand their discretionary income,such as a rising sign of land transfer income.