An Analysis Of Local Government Debts

In this essay, the author first made a brief introduction to the relevant theories about local government debts, and defined the term. Then, the author moved on to comment on these theories, concluding that current theories mostly focus on the hazards of such debts on the local governments, but ignore their positive effects. The author argued that the appearance of local government debts is both inevitable and necessary. The author further quoted Longquanyi district of Chengdu city to analyze the relationship between government debts and economic development. By employing the analysis methods of combining theories and empirical study, the author reached the conclusion that county-level governments should control government debt risks and scale while borrowing money to fund infrastructural construction and promote economic development in the county regions under the inflationary fiscal policies. Local governments should be legally allowed to borrow money within their capacity, and establish well-functioning systems to control corresponding financial risks, the author argued.This essay has five chapters.In the first chapter: The Introduction, the author introduced the significance of such research, theories and research methods to be employed, the logic structure and basic thoughts of the essay. The author also briefed the research background, literatures and references, and its viewpoints.In the second chapter: Analysis of Public Finance of Longquanyi district, the author mainly analyzed fiscal incomes and expenses of Longquanyi district over the recent three years, predicted its economic development and fiscal incomes and expenses in the future ten years, and concluded the fiscal operating status of the district.In the third chapter: Analysis of Debt Scale & Solvency, the author analyzed existing debts, the indebtedness ratio, and the debt service ratio of Longquanyi government. Then, the author employed the debt risk assessment indicators prevailing in the European Union and the US to analyze the economic growth speed of Longquanyi sistrict, and worked out the objective for the district's economic growth. The author finally proposed the optimal debt scale of Longquanyi sistrict over the following ten years in line with the timetable to reduce debt risks and pay off debts, and the borrowing ability.In the fourth chapter: Local Government Debts in China: Status Quo, the author analyzed the current status of debts of local governments in 15 small and medium-sized cities, Qingdao and Chongqing. Almost all of the local governments have resorted to the inflationary fiscal policies to fund their huge construction programs. A comparison shows that the majority of Chinese cities still have enough debt-paying ability to borrow more money, and the 20% debt service ratio 20% is applicable to local governments in large and small-sized cities. Because of limited financing channels and limited resources, the local governments always face severe fiscal risks.In the fifth chapter: Debt Scale Control & Management, the author concluded on the basis of aforesaid analysis that local governments shall strengthen control and management of their debts while taking active measures to stimulate local economic development. The governments shall also establish a strict government-debt monitoring & inspection mechanism for liquidating kinds of debts and creating public financing channels. They shall also standardize their management of debt financing and prevent the debt risks.The main viewpoints of this essay are as follows:1. It is a general practice for local governments to borrow money to finance local capital construction, and there have been no relevant theories about the moderate scale of such debts or safety line standard.2. Judging from the situations of some local governments, they have already been heavily indebted, and faced with increasing financial risks. Judging from the overall situations of local governments, their debt scale is still within the controllable range. Restricted by limited resources and financial strength available, local governments are exposed to huger financial risks than the central government. Therefore, it is the very focus for local governments to strengthen local debt management, prevent and decentralize debt risks.3. Step up the reform of the central public finance, and make relevant laws to allow local governments to borrow money so as to change idle money into productive capital, resolve the financial squeeze of local governments to fund capital construction and promote local economic construction. Establish rigid budget management system to prevent excess indebtedness at local governments arising from excessive expenditure.4. Local governments shall inventory various kinds of debts, and gradually resolve local government debts. It is the ultimate solution to resolve the local government debts by deepening reform, reducing local fiscal expenditure and enhancing the financial strength of local governments. Local governments shall establish high-efficiency government debt management mechanisms, flexible debt-repaying mechanisms, strict supervision and examination mechanisms and risk warning systems to prevent local government debt risks.