Study On Relieving Government Debt Stress

The pressure of government debt is closely related to the supply capacity of an economy. We usually focus on the demand side of the economy when studying the short-term economic growth, and the supply side when studying the long-term growth. The economic supply capacity is the embodiment of the long-term economic output capacity, which depends on the growth of input elements—capital stock(K) and human capital stock(H), and the growth rate of total factor productivity (TFP) that is the comprehensive efficiency of factor inputs. According to Solow model and endogenous growth theory, this paper estimates the contribution of capital, human capital and TFP to GDP growth since 1978 basing on the perspective of macroeconomic supply side, and the rate of return on capital investment in these years. Through the analysis of the trend of human capital and TFP in the "Thirteenth-Five years", this paper calculates the amount of investment in fixed assets should be increased, under the different GDP growth rate targets. At the same time, basing on the analysis of those industries including real estate, manufacturing and infrastructure construction, which demand large amount of fixed assets investment, this paper predicts the increasing amount of fixed assets investment on infrastructure, and hence the debt pressure the government and public institutions may bear. Among them, the government debt includes explicit direct and contingent debt, and government debt pressure is measured by two indicators:the scale of government debt and the proportion of government debt accounting for GDP.Basing on international experience, this paper takes Japan as an example. Extremely low total fertility rate over a long period of time causes a great negative impact on the growth rate of human capital. Zombie companies and high-debt rate of corporate and government drive the national balance-sheet into recession over a long period of time, and brings about TFP in 1990's obviously lower than that in 1980's, which greatly damages Japan's economic supply ability, and Japan has experienced the GDP growth fatigue over a long period of time. The government debt problem of "PIIGS" is highly concerned in recent years. Low growth rate of human capital and TFP lends these five countries into a dilemma, sluggish tax revenue growth and heavy social welfare burden bring the governments heavy debt burden out of the ability to repay.Since the reform and opening up more than thirty years, benefiting from great population bonus and major system bonus, such as rural contract management system in 1984, setting socialist market economy goal in 1992, and joining the WTO in 2001, the average growth level of China's TFP was quite high before 2007, and China experienced three decades ultra-high-speed growth boom. However, the structural problems in China's economic development gradually emerged after 2008. As the total fertility rate going down, China's population bonus gradually subsided. The number of China's 15-59-year-old population has declined since 2011, and growth rate of the number of migrant workers approched 0 for the first time in 2015. Labor cost rised sharply and the comprehensive cost including environment and land soared, and the growth rate of human capital and TFP tend to decline, lead to a decline in the return on investment in the real economy and hence private investment willingness slumped. China faces the substantial decline trend of economic growth potential. Under the goal of doubling the GDP scale in 2020 compared with that of 2010, governments at all levels try to promote the growth of capital stock, which means increasing the investment in fixed assets, in order to keep 7%-8% economic growth rate. These stimulus behaviores have caused and will contiously cause a series of long-term and structural problems such as the real economy's return on investment falling more sharply, excess production capacity in multiple industries, the government debt scale rising too fast and so on.Owing to two rounds of economic stimulus from the end of 2008 to 2010 and from 2013 to current time, the scale of government debt rises quite fast. The calculation results of government debt's scale from Li Yang, Standard Chartered Bank, and Xiang Huaicheng are larger than that published by the National Audit Office. This paper integrates related estimation methods and estimates the scale of government debt in China is about 41.826 trillion at the end of 2014, among which the amount of central government debt is 13.19 trillion (treasury bonds plus railway general corporation debt), and local government debt 28.636 trillion(city investment corporation bonds, infrastructure trust, financing platforms loan, BT debt and others), which is less than 30.28trillion estimated by the team of Academy of Social Science lead by Li-yang.In the "thirteenth-five" period, descending GDP growth potential and exorbitantly high GDP growth speed goal will both influence the government debt pressure. Firstly, the growing speed of TFP and labor capital hardly improve significantly, and economic growth still excessly depends on fixed asset investment. There is little possibility of major science and technology revolution, and revolution bonus may only possibly release just in the later period of the "thirteenth-five" at least. Secondly, the upgrading space of return on investment is quite limited, which poses a negative impact on government revenue. From the view of economic cycle, world economy is on the downward path of Kondretieff cycle and Kuznets cycle. Therefore, return on investment in the fixed assets may still stay in the low level, and stability of tax and land fiscal revenues will still suffer adverse effects. Thirdly, real estate in most cities and manufacturing are stagnant, and under the influence of low return on investment and long payback period, it will be more difficult to bring social and private investors into infrastructure construction. In other words, the government and public institution will continuously be the the main forces in driving GDP growth. Fourthly, there will be excessive debt pressure on government if GDP growth rate target is excessively high in "Thirteen five" period, which will bring a negative impact on debt risk control and growth quality improvement.On the basis of the study mentioned above, by estimating the growth of fiscal revenue and human capital in the "thirteenth-five" period, and assuming 3 different growth rates of TFP and 4 paths of GDP growth, this paper predicts the mount of investment on infrastructure that government should bear and corresponding the government debt pressure. According to the estimation, when TFP is in the low level and the GDP growth goal is high, such as 6.5%-7%, the demand of fixed asset investment will rise quickly and hence cause excessively heavy government debt pressure. Meanwhile, when TFP is in a high level and the GDP growth goal is not too high, the demand of fixed asset investment will drop and hence reduce the government debt pressure. And what is more, under the second condition, in the late period of the "thirteenth-five", raising GDP growth goal moderately will not pose a negative impact on government debt and improve the growth quality.In short, TFP and human capital are two important factors in economy supply side, which determine the speed and quality of economic growth and are also the most important factors influencing the government debt pressure. In the next five to ten years, we should not set up a excessively high GDP growth target for the economy to prevent continuing deterioration of the economic supply capacity and GDP growth potential and not to trigger the systemic risk related to government debt. On the contrary, this paper suggests that great importance should be attached to economic supply side optimization, and great efforts should be taken to achieve intensive and inclusive growth including solving the "offside" and "absence" problem, which will contribute to creating a more equitable, transparent and efficient business and investment environment,reducing the comprehensive cost of social operation, and improving TFP and human capital growth to boost investment return rate, and reduce government debt risk.