China’s Fiscal Sustainability

Public finance is the foundation and an important pillar of state governance.Fiscal sustainability reflects the state’s governance capacity and level of administration and is crucial for stable state administration and sustainable economic and social development.The connotation of fiscal sustainability should not be confined to short-term balances of payments,nor should it be measured by the monotonous indicator of deficits and debts in an accounting sense.Instead,we should adopt an expansive and strategic perspective,taking into consideration the government’s role in dealing with global uncertainties and public risks.This thesis first explicates the connotations and measurement of fiscal sustainability,then analyzes the definition of fiscal sustainability from both narrow and broad perspectives and discusses the common measurement indicators of fiscal sustainability,including the Maastricht Treaty and the IMF debt scale dynamic model.Based on the metrics presented above,it is concluded that China’s current public finance is sustainable.Afterwards,the thesis argues that the traditional analytical framework and related indicators are insufficient in terms of comprehensiveness and applicability,such as the lack of attention to implicit debt and other debts that the government as a public entity needs to undertake,as well as insufficient acknowledgement of the deep root causes of public risk as a fiscal risk.In light of that,the thesis introduces the perspective of public risk management and proposes to judge whether public finance is sustainable based on the comparative relationship between the public resources owned by the government and the expenditure responsibilities and obligations that the government should bear,as well as the public risks that the government needs to deal with.Fiscal sustainability,in this context,means that the public resources owned by the government are sufficient to fulfill its expenditure responsibilities and obligations,making it capable of dealing with public risks to ensure the stability and development of the economy and society.From the perspective of public risks,this thesis finds and analyzes the main risk points in the dimensions of economy,society,resources and ecological environment,international environment,and institutional level,and proposes that public risks derived from these aspects will eventually be transformed into financial risks to varying degrees.On the one hand,public risk may automatically become the government’s public responsibility,and part of it will directly evolve and transform into fiscal risk.On the other hand,a proactive response to handle and hedge public risk,exchanging the increase of fiscal risk for the reduction of public risk,will also affect fiscal sustainability.Finally,based on the risk points and root causes analyzed in the previous chapters and adhering to risk orientation,this thesis makes policy recommendations,including firmly deepening reform,strengthening macro-control to stabilize economic growth,accelerating the establishment of a modern fiscal system,improving the top-level design of the social security system,and preventing and resolving hidden debts in a proactive and steady manner.The innovative points and main contributions of this thesis are as follows: Firstly,the thesis resorts to the public risk theory,which is more pertinent to China’s conditions,and examines fiscal sustainability and major risks with an eye on the dual identities of the government as both an economic and a public entity as well as relevant practice in China,going well beyond the traditional analytical framework of deficits and debts.Secondly,the thesis dwells upon and proposes relevant issues that need to be further clarified in the examination of fiscal sustainability,including clarifying the difference between debt and liability,government debt and civil debt,the boundary between government and enterprises,and the selection of indicators.As to the choice of indicators,they should be comprehensive and adaptable.Thirdly,the thesis explores the often-discussed topics concerning fiscal deficit ratio and debt ratio standards as defined in the EU Maastricht Treaty,as well as the calibre of deficit by the IMF,and made suggestions based on the research and judgment of public risks.