Study On The Transfer Payments And Local Government Size Under The Chinese Fiscal Decentralization

The optimal size of government has been one of the hot topics of public economics research. After the economic reform, China has created "economic miracles" continuously, and meanwhile the government size showed a sustained growth trend. From 1978 to 2014, the average annual growth rate of Chinese total public expenditure is more than 14%. With an annual growth which is more than 20%, the local governments’size showed an overspending trend of expansion, especially after the tax reform.This paper introduces the theories of government size at the beginning. After analyzing the changes of Chinese local governments’size, we found the institutional causes in the excessive growth of local governments. The central government has centralized the authority in raising public funds since the tax reform, while shared more spending responsibilities to local governments. Facing the serious unbalance of local financial revenue and expenditure, the central government need transfer lots of resources to the local annually. Especially after 1999, the central government increased the lump-sum grants and special transfer payments to western regions, which provides the base of "flypaper effect". In chapter 4, we found that lump-sum intergovernmental grants has a "price effect", as well as an "income effect", which lowers the marginal cost of public funds, while still providing the same level of public service, thus stimulating the rapid growth of local governments’public expenditure. Using the panel data of 31 provinces during 1996-2012, we found that the "flypaper effect" does exist in our country:if the transfer payment increase one Yuan, the fiscal expenditure will be stimulated to increase 0.7-1.5 Yuan, while the effect of growth of personal income is only 0.04-0.2 Yuan.According to the conclusions, this paper puts forward some suggestions, including accelerating the development of the local tax system, making reasonable arrangements for the transfer payment system and enhancing the local financial self-sufficiency rate etc.