The Formation Of Land Finance Revenue And Its Influence On The Expenditure Preference Of Local Government

In recent years, the local governments acquired a large amount of land revenue through the land financial strategies. The increasing land revenue can effectively alleviate the financial pressure and provide important funds for local economic development and infrastructure construction. But this pattern of development characterized by over-dependenting on land financial revenue can cause a series problems, such as conflicts in expropriation of land, urban extension and expansion, inefficient land use, unreasonable land price, high house price and so on, which would have negative impact on transformation and restructuring of economic development. As the unsustainable land finance is an even worse problem, reforming the land finance problems is imminent. However, because of the deviations on the understanding of the essence of the land finance problems, there is no consensus on the direction of future reform in academic circles. Based on the above analysis, this paper attempts to analyze the incentive mechanism faced by local governments firstly, and then explores the internal mechanism and behavioral mechanism in terms of local governments’land financial behaviour and analyses the incentive processing and behavioral mechanism of the relevant institutional arrangements towards the land finance. Meanwhile, based on the perspective of fiscal expenditure, this paper aims to study the internal strengthening mechanism of the land finance, and then exhibits the behavioral preference of the local governments on revenue and expenditure. Specifically, from the perspective of the revenue formation of land finance and its impact on the government expenditure, this paper builds a theoretical framework and provides the theoretical guidance and basis of decision making for the reform of land financial problems. Finally, this paper proposes the reform objectives and institutional design of the land financial problems.This paper applies several methods, such as theoretical analysis, spatial econometric models, simultaneous equations models and so on. Panel data from provincial regions from 1999 to 2011 are adopted to analyze the overall characteristics, external incentive mechanisms and institution foundation of land finance. And then this paper analyzes the internal strengthening mechanism between land finance and government expenditure and points the issue and reform paths of land finance, and the main conclusions are as follows:In terms of the overall characteristics, this paper first calculated the scale of land finance revenue, which contains the land-transferring fees and land taxes, and then discussed the interrelationship between the land finance revenue and local governments’ revenue and expenditure, summarizing the structure characteristics of land finance revenue. Finally, the paper interprets the characteristics of path dependence of land finance theoretically. The results show that:(1)It is clear that the scale of the land finance, which is calculated by estimating the land selling revenue and land tax, developed quickly, and the eastern region of China, which is relatively more developed, had a much larger scale of land finance than those in central and western region of China. According to the relationship between the scale of the land finance and local governments’revenue and expenditure, land finance significantly contributed to the local fiscal. And compared with central and western regions, a more significant role was played in local governments’ revenue and expenditure in developed eastern region. (2)With regard to the structure of land fiscal revenue, the land tax took a small proportion all over the country. The land granting revenue kept a far greater proportion than land tax revenue, no matter in areas with large scale land finance or areas with small scale of land finance, which can be concluded that there is imbalance structure on land revenue. (3)There was a significant path dependent effect in land finance for local governments, especially in three aspects as follow: firstly, the scale of land revenue increased rapidly, and the local governments’revenue and expenditure depended on land revenue more and more heavily. Secondly, there was also an imbalance in the structure of land revenue. The one-off land granting revenue took a high proportion, however the long-term land tax revenue only occupied a fairly small part of the total revenue. Thirdly, the land financial strategies cannot be replaced in the short term, as there was lack of alternative strategies.In terms of external incentives mechanism, under the condition of Chinese style decentralization system, in order to maximize the revenue, the local governments had a serious competition in financial and capital, which caused different effects in land granting strategy and land investment introduction strategy and ultimately motivated local governments to seek land finance revenue. Due to the spatial interaction between different local governments, there also exists imitation or substitution effect among different regions. According to the different means of land granting, the proportion of land area sold by bidding, auction and listing were used to reflect the land granting strategy, and the proportion of land area sold by agreements and allocation were used to reflect land investment introduction strategy. The empirical analyses show that:(1)The incentive mechanism is different between land granting strategy and land investment introduction strategy in Chinese-style decentralization, and the financial competition(restraint of financial revenue and expenditure) was the main incentive of land granting strategy, whereas the capital competition was the major incentive of land investment introduction strategy. Land granting strategy and land investment introduction strategy had different spatial interaction relationship respectively. (2)The spatial imitation effect of the land granting strategy was reflected in the area of land, rather than the frequency. And the spatial imitation effect of the land investment introduction strategy was reflected in the chase of the large-scale capital. At the same time, the spatial substitution effect of the land investment introduction strategy was reflected in the frequency of low-priced granted by the local government, which showed that local governments will not blindly pursue the frequency of granting the land at low price but pay attention to attracting the large scale investment by granting the land at low price. The results confirmed that the Chinese style decentralization system was the external incentive mechanism of the formation of land finance revenue.In terms of land finance revenue’s foundation of institution, local governments can decide the price mechanism and disposition mechanism of revenue in land market through its dominant position, thus the government can acquire the land financial revenue. So the institutional arrangement of land market led by government was the internal institution basis of the land finance. And the government dominance in income distribution mechanism determined the distribution pattern of land revenue, which was the root cause of land finance. Firstly, this paper explained the impact mechanism of land market institution led by government on land finance, and proposed four hypotheses that are available for testing. Then applied the simultaneous equations models, we gave an empirically analysis and the results showed that:(1)The marketization reform of land transfer methods had resource allocation effect, which can enhance the land price, increase the scale of land revenue and become the basis of forming the land finance. (2)The right to regulate the farmland conversion cannot directly create the revenue itself, but the lack of supervising can induce the government’s overuse of this right to acquire the land finance. Thus the control to the farmland conversion is the power base of the land finance. (3)In revenue disposition mechanism, the governments which are located in a dominant position can formulate the policies, and decide the allocation arrangement, while the village collectives, farmers as well as other subjects lack mechanisms of expressing the interests. Therefore, the root reason of forming the land finance was the revenue disposition mechanism led by the governments. (4)The lack of the supervising mechanism to governments’behavior was also an important reason that formed the land finance, because the construction land approval system, investigation illegal land use institution and land revenue control and management policies have not achieved the anticipated goal which have a limited role in controlling the land financial behavior led by the governments. (5)As illegal land use can bring the land revenue and hidden income to the governments, thus the local governments had great incentives to intervene in the land market, even directly taking part in this process and thus disturbing the regular order of the land trade, having nagetive impact on development of land market. It means that there is a close relationship between the land finance and the development of the land market which influence and depend on each other, where illegal land use is an important intermediary link.In terms of the relationship between land finance and government expenditure, this paper introduced the local governments’land financial behavior in the existing framework of local government budget revenue and expenditure, and analyzed the logical relationships and influence mechanism between the land financial revenue and the preference of local governments’expenditure, and then proposed the theory of internal strengthening mechanism in land finance. Because the management system and the supervision level were different between budgetary revenue and extra-budgetary revenue, this paper respectively built the land granting revenue equation and land tax equation to examine its different effects. Then, simultaneous equations model was used for empirical analysis, and the results showed that:(1)The optimal choice and disposition of land revenue play an important role in preference of local governments’revenue and expenditure. By introducing the land financial revenue, it is found that the land financial revenue was not only consistent with the goal that revenue maximization of local government, but also fully dominated by local governments. Therefore, the land finance exacerbated the preference that the governments pay more attention to investing on infrastructure rather than public service. Even with increasing size of the land revenue, local government could increase the expenditures of public services, but there was a strong preference for local government to invest in the infrastructure construction. (2)The growing social responsibility can put press on the governments’ revenue and expenditure, and considering the multiplier effect and spillover effect of government expeditures, land finance was formulated the internal strengthening mechanism. (3)Since subjected to more stringent budgetary supervision, once land tax firstly meet its capital expenditure, it would be appropriate for the public services expenditure, however, the improving role about the structure of government expenditure was not obvious in real world. And when expenditure responsibility of local government was increased, local government was facing the increasingly severe fiscal pressure of government revenue and expenditure, and then the extra-budgetary land transferring revenue become the major goal that local governments chased.Finally, by summarizing the results of the study, this paper found that the substance of land financial revenue is the problem of land income distribution mechanism. In terms of land finance revenue, the performance is that the government plays a decisive role in land price formation and income distribution mechanisms alternative market mechanisms and the land transfer revenue which is over-relianced by government is not sustainable. In terms of land finance expenditure, the performance is that the land finance expenditure need to be turned to public services and to ensure the effectiveness and sharing of fiscal spending. Then this paper proposed the reform objectives and the specific design of institution in terms of revenue and expenditure of land finance, also gave several suggestions in following three aspects:firstly, about the land financial revenue, land marketlization reform should be promoted, as well as improve the land revenue distribution mechanism led by government, reform the land taxation system, increase the proportion of land tax revenue, and optimize of land revenue structure. Secondly, about the land financial expeditures, it is necessary to promote a sustainable growing public finance and transformation of local economic development, form the positive interaction betweent the land financial revenue and public service expenditures, enhance the expenditure management of land revenue, improve land revenue regulatory mechanism. Thirdly, we need to reform the local government incentive and restraint mechanisms of land finance behavior. Policies should aim to reform the decentralization taxation system, match powers and expenditure responsibilities of local government, balance local financial revenue and expenditure, improve government performance evalution system, to change its incentive effect on the behavior of local government. Regulating the government right of land conversion, reforming the implied land finance motives of the control right are also need to take into account, as well as improving the monitoring mechanisms of local government behavior, effectively constraining the land financial behavior of local government.