Fiscal Competition,Soft Budget Constraints And Fiscal Sustainability Of Local Governments In China

Chinese-style decentralization has always been regarded as an important institutional arrangement for creating the miracle of China’s economic growth.Fiscal decentralization and the vertical political management system,which constitute the core connotation of Chinese-style decentralization,have respectively formed fiscal and political incentives for local governments,making them spare no effort to promote local economic growth adopting various means.On the one hand,in order to obtain political benefits,local governments use various fiscal tools to compete for financial resources,economic resources,and GDP growth.For example,they use tax incentives such as tax cuts and lowing tax effort to conduct tax competition,and participate in expenditure competition through increasing fiscal expenditures,improving public service and the investment environment.On the other hand,to fill the "natural fiscal gap" derived from the asymmetric fiscal decentralization and the "competitive fiscal gap" created by fiscal competition,local governments compete for transfer payments from the central government within the budget,engage in extra-budgetary land finance,and use local government financing platforms to seek non-budget income.These revenues relax the budget constraints of local governments.Fiscal competition and soft budget constraints have provided the means and funds respectively for the incentive mechanism of the Chinese-style decentralized governance model,which has made a great contribution to China’s economic growth by turning this incentive into reality.But it also has a profound impact on the fiscal sustainability of local governments.Since the reform of the fiscal decentralization,inter-governmental fiscal competition and soft budget constraints have become the important fiscal phenomena for local governments in China.What is the state of fiscal competition among local governments at all levels,what are the effects of soft budget constraints in different manifestations on local government competition,and what are the interaction effects between fiscal competition and soft budget constraints on fiscal sustainability of local governments at all levels? Through the study of government competition mechanism,soft budget constraint and the degree of local fiscal sustainability,can we make an objective evaluation of China’s current fiscal system and the fiscal sustainability of local governments at all levels,and put forward policy recommendations related to issues such as how to deepen the reform of the fiscal and taxation system,prevent local fiscal risks,and expand active policy space? The answers to these questions constitute the main research objectives of this thesis.This thesis is dedicated to investigating the impact of these fiscal system factors on the fiscal sustainability of local governments under the basic analysis framework of "Fiscal System-Local Government Behavior-Local Fiscal Sustainability".And using progressive research logic,we differentiate and test the relationship between them according to the fiscal characteristics and typical problems of local governments at different levels.Chapter 1 introduces the background and significance of the research on local fiscal sustainability in China,and clearly defines the concepts of fiscal competition,soft budget constraints and local fiscal sustainability used in this thesis.We divide fiscal competition among local governments into income and expenditure competition,and summarize the large-scale transfer payments derived from the vertical fiscal imbalance,the extra-budgetary activities and large-scale hidden debts caused by the limited fiscal discipline and the lagging financial system development as the main forms of the current soft budget constraints of local governments in China.On this basis,the research framework of this thesis is constructed.Chapter 2 reviews the main contents of fiscal decentralization theory,local government competition theory,budget soft constraint theory and fiscal sustainability theory,as well as the development and application of these theories in China.The above theories constitute the theoretical basis of this thesis and play an important guiding role.Chapter 3 establishes the theoretical analysis framework of the full text under the institutional background of China.First,fiscal competition,soft budget constraints and local fiscal sustainability are incorporated into the framework of Chinese-style fiscal decentralization,and the connection mechanism between the three is systematically explained from the theoretical and practical levels.Then we build an inter-temporal financing game model of local governments including fiscal competition mechanism and different forms of soft budget constraints,and analyze the impacts of fiscal competition and different forms of soft budget constraints on local governments’ behaviors and interaction between them through numerical simulations.The results are as follows:(1)Local governments’ competition in attracting capital by means of taxation or expenditure has a negative impact on fiscal sustainability,which will be intensified with the increase of the central government’s emphasis on economic growth performance,but will be improved as the weight of the utility of residents’ public goods in the local government objective function increases.(2)The increase in the degree of equalization of transfer payments directly lows the tax efforts of local governments,and reduces productive expenditure and output,while increases people’s livelihood expenditure and government debt.The increase of special transfer payments for production prompts local governments to increase expenditures on people’s livelihood and production,which leads to an increase in government debt and output,but a decline in expenditure efficiency.The rise of special transfer payments for people’s livelihood significantly increases people’s livelihood expenditures and government debt,but the impacts on tax efforts,productive expenditures,output and expenditure efficiency of local governments are uncertain.(3)As the proportion of land transfer increases,local governments’ livelihood fiscal expenditures and local tax rates rises slowly,while the productive expenditure and debt of financing platform decreases gradually.The price of land transfer in the two periods also shows a downward trend,while the output and expenditure efficiency show an upward trend.The larger the proportion of land used for mortgage financing,the lower the livelihood expenditure and local tax rate,the higher the production expenditure and the debt of the financing platform,because the increase in the proportion will reduce the scale of land used for production for enterprises,resulting in higher land prices and lower output.The greater the capitalization effect of public investment expenditure in land prices,the higher the land transfer price,the larger the scale of local government expenditures,taxes,and financing platform debt,and the higher the scale of output,but it has a negative impact on expenditure efficiency.Chapter 4,chapter 5 and Chapter 6 are the empirical parts of this thesis,which use the data at provincial,prefecture and county levels respectively to test the effects of fiscal competition,soft budget constraints and the interaction between them on fiscal sustainability of local governments.Firstly,Chapter 4 integrates governments at provincial and lower levels into “local governments”.Based on the concept of “effective fiscal space”,it measures the fiscal sustainability of local governments in various provinces,and systematically investigates the impacts of different fiscal competition modes and the forms of soft budget constraints on the fiscal sustainability of local governments.The results are as follows:(1)Both tax competition and expenditure competition have a significant negative impact on fiscal sustainability.The impact of transfer payments is uncertain,while land revenues and municipal investment bonds have a significant inhibitory effect.(2)The positive effect of fiscal competition on transfer payments and the weakening effect of transfer payments on fiscal competition make their interactive mechanism conducive to fiscal sustainability.The strong two-way promotion effects between expenditure competition and land finance,as well as between tax competition and urban investment bonds,caused their interaction mechanisms to have significant negative impacts on fiscal sustainability.(3)In the areas with poor economic development and financial resources,the negative impact of fiscal competition on fiscal sustainability has been weakened,the positive effect of transfer payments is greater,the negative effect of urban investment bonds is greater,and the regional differences in the impact of land finance on fiscal sustainability are not obvious.(4)The benign interaction mechanism between transfer payment and expenditure competition is more conducive to the fiscal sustainability of underdeveloped regions.There is no regional heterogeneity in the negative impact of the interaction mechanism between land finance and expenditure competition on fiscal sustainability.The negative impact of the interaction mechanism between urban investment bonds and tax competition on fiscal sustainability is more pronounced in underdeveloped regions.Secondly,in view of the different degree of fiscal competition among lower-level governments,and the non-budget revenue,which consists of land transfer revenue and financing platform debt,mainly occurs in the city and county grassroots governments,Chapter 5 extends the research to prefecture and county levels to further investigate the fiscal behaviors of governments at the grassroots level,the relationship among different forms of the non-budget revenue,and the impacts of fiscal competition and non-budget revenue on the fiscal sustainability of governments at the grassroots level.This chapter measures fiscal sustainability of local governments below the provincial level,and tests the impacts of fiscal competition between governments at prefecture and county levels and various forms of non-budget revenue on fiscal sustainability after clarifying the connection mechanism between financing platform debt,land transfer income and land price.The results are as follows:(1)Land transfer income and land price play important roles in promoting the debt of financing platforms,and the increase in the debt scale of financing platforms will in turn promote the rise of land prices,thus leading to the increase in land transfer income.(2)Different from the conclusions of the research on local governments at provincial and lower levels as a whole,although the fiscal revenue competition among prefecture-level governments has a significant negative impact on fiscal sustainability,fiscal expenditure competition has a positive effect on fiscal sustainability.The increase of land fiscal dependence is not conducive to the improvement of fiscal sustainability,especially the increase of the dependence on the revenue from auction and sale.(3)There is a certain degree of complementary relationship between land fiscal revenue,financing platform debt and fiscal revenue within the budget,and there is a non-benign interaction mechanism between the non-budget revenue and fiscal expenditures competition.(4)The degree of expenditure competition in the eastern region,and expenditure and income competitions in the central region is too high,which has begun to damage the sustainability of local finances.Due to its weak economic foundation and tight fiscal pressure,the western region is relatively less involved in expenditure competition and has not yet had a negative impact on fiscal sustainability.In addition,the income from bidding,auction and listing in the eastern region has a negative impact on fiscal sustainability,while the income from the land agreement transfer in the eastern and central regions is conducive to the improvement of the financial situation,but the income from the land agreement in the western region further deteriorates the financial situation.Lastly,given that the county-level government is responsible for most of the basic public service provision in China,and it is the actual executor of policies and the ultimate goal of transfer payments,whose expenditures are highly dependent on transfer payments from higher-level governments,Chapter 6 selects the county-level governments as the research object.Using the“Province-Managing-County” fiscal reform as a quasi-natural experiment,this chapter empirically tests the relationship between fiscal competition,transfer payment and efficiency of fiscal expenditure by multi-period continuous the difference-in-differences methods.The results show that the fiscal competition among county-level governments in China has a significant negative impact on the efficiency of fiscal expenditure,especially on the social efficiency of fiscal expenditure.General transfer payments can properly alleviate the negative impact of fiscal competition,but special transfer payments fail to play a positive role as a moderator.The heterogeneity analysis shows that the transfer payments to the central and western regions have a negative impact on the efficiency of fiscal competition,and the transfer payments to the regions with higher fiscal autonomy are conducive to the improvement of the efficiency of fiscal competition.Further research indicates that higher levels of fiscal transparency,government governance,marketization and openness promote the improvement of economic efficiency of fiscal competition,but have no obvious influence on social efficiency of fiscal competition,which shows that the current institutional system construction is mainly oriented to the improvement of economic efficiency,and insufficient attention has been paid to the improvement of social efficiency.