Government revenue is the source of funds for local governments to arrange fiscal expenditures and provide public services.With the completion of tax-sharing system reform in 1994, the financial capacity of the central government has been rapidly improved, but local governments face with increasing pressure on their budgets. The transfer payment system plays an important role in narrowing the gap among regions in economic development and public services. However, the problems with China’s transfer payment system are very obvious. In addition to the unreasonable structure, potential problems such as irregular allocation, opaque implementation and lacking supervision in the transfer payment budget management process are usually mentioned in the literature. These problems exist in the transfer payment system may directly restrict its effectiveness. Differing from previous studies that focus on the economic effects of the scale and structure of transfer payments, this paper discusses the impact of transfer payment volatility on fiscal expenditure bias from the perspective of uncertainty, which is a relatively new perspective. As a whole, transfer payment volatility caused by the inadequate management of government budget increases the uncertainty of local government revenues, leading to a decline in the expected utility of local governments. To avoid the utility loss, local governments tend to increase productive expenditures to stimulate regional economic development and maintain fiscal revenue stability. In detail, this paper builds a theoretical framework to demonstrate how transfer payment volatility affects local governments’ fiscal expenditure bias in China, and then uses the county-level data to examine their relationships. The empirical results show that transfer payment volatility significantly aggravates local governments’ fiscal expenditure bias towards productive activities, and the effect manifests an asymmetric feature, which is more prominent in central and western areas, and regions with lower net inflow of transfer payments and fiscal self-financing rates. In addition, the results pass through a series of robustness checks, including an instrumental variable method, adjustment of core variable measurement and accounting for other major events. Therefore, our findings reveal that, transfer payment volatility will further aggravate the insufficient supply of social public goods by local governments. In order to achieve the policy goal of equaling basic public services among regions during the period 2020-2025, which was mentioned in the report of the 19th National Congress of the Communist Party of China, besides making steady progress in reforming the division of administrative authority and spending responsibilities between the central government and local governments, it is also necessary to standardize the budget management system of transfer payments to reduce the transfer payment uncertainty of local governments.
Transfer Payment Uncertainty and Local Fiscal Expenditure Bias in China
Journal of Finance and Economics Vol. 45, Issue 06, pp. 4 - 16 (2019) DOI:10.16538/j.cnki.jfe.2019.06.001
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Cite this article
Liu Guanchun, Zhou Wei. Transfer Payment Uncertainty and Local Fiscal Expenditure Bias in China[J]. Journal of Finance and Economics, 2019, 45(6): 4-16.
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