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Local government fiscal decisionmaking and risks faced by it in the context of double tradeoff mechanism(PDF)


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Local government fiscal decisionmaking and risks faced by it in the context of double tradeoff mechanism
LIU NaixiJIANG Mingzhe
School of International Economics,China Foreign Affairs University,Beijing 100037,China
double tradeoffpublic budgetfiscal decisionmakinglocal governmentfiscal deficiteconomic growthtransfer payment
In order to study whether the actual fiscal capacity of local governments in China faces a deficit and the issues of fiscal deficit decisionmaking in the public budget, this paper considers public budgetas the endogenous variable which can be adjusted through the intensity of fiscal levy by local governments, and conducts analysis on the financial revenue and expenditure of central and local governments. According to the study, firstly, with the addition of the local nonpublic budget revenue, it is found that there would be a surplus instead of a deficit in the actual fiscal capacity of local governments. Secondly, different from regarding the public budget revenue as an exogenous variable unrelated to the government’s behavior in previous literatures, this paper regards it as an endogenous variable. Based on the new assumption, it is found that local governments have to consider both the shortterm tradeoff of"total public budget revenue vs. net public budget revenue" and the longterm tradeoff of "economic growth competition vs. financial revenue" while making fiscal decisions, which would urge local governments to be partial to moderating the fiscal levy intensity to achieve the optimal fiscal budget revenue rather than the maximum one in shortterm tradeoff, and prefer continuously moderating the public budget revenue to maintain the public budget deficit in the longterm tradeoff. Finally, the double tradeoff mechanism will aggravate the fiscal imbalance between the central government finance and the local government finance, affect the longterm stability of the central government finance and weaken the sustainability of local public expenditure growth to some extent. The paper suggests promoting the fiscal system reform and seeking the new balance point of the fiscal relationship between the central and the local governments, so as to meet the needs in new era and ensure the fiscal system always be the major impetus of economic development.



Last Update: 2020-10-27