The paper explores the research on local government debt from the perspective of fiscal decentralization, focusing on the causes and implications of such debt within China's economic framework. It analyzes theoretical and empirical studies to understand how fiscal decentralization influences local government borrowing practices. The study highlights the challenges posed by an imperfect tax-sharing system and the complex incentives that drive local officials' behavior in managing public financing platforms. The research emphasizes the need for a comprehensive approach that integrates existing academic insights with China's unique institutional context.
In comparing the government sector with the private and financial sectors, it is observed that while the private sector typically borrows due to liquidity needs or income fluctuations, the government operates under different constraints. Unlike the private sector, which faces market-driven interest rate and loan amount restrictions, the government has the authority to issue currency, potentially leading to inflation as an implicit tax on individuals. This flexibility makes government debt more manageable, provided political stability is maintained.
Local governments play a crucial role in providing public goods when tax revenues fall short. However, their unique position as a public authority introduces distinct risks. The potential for systemic risk necessitates legal market competition and institutional supervision to constrain financial institutions effectively. The paper further discusses the complexities of intergovernmental transfer payments and the impact of fiscal federalism on local debt management.
The existence of sub-institutions raises questions about ensuring sufficient debt funds for local public expenditures while imposing reasonable restrictions on excessive spending. The paper explores various models of local government debt management, including market constraints, rule-based regulations, and direct administrative controls. Each model presents its own advantages and challenges, emphasizing the importance of transparency, credibility, and flexibility in policy design.
The paper also examines the role of local government financing platforms, highlighting their rapid growth and associated risks. These platforms have become significant sources of local government debt, raising concerns about financial sustainability and systemic risks. The study underscores the need for effective regulation and oversight to mitigate these risks and ensure responsible borrowing practices.
Additionally, the paper addresses the broader implications of local government debt on macroeconomic stability, public services, and economic development. It calls for a balanced approach that considers both short-term interventions and long-term structural reforms. The conclusion stresses the importance of adapting international best practices to China's specific context, ensuring that local government debt management aligns with national economic goals and social welfare objectives.
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