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Fiscal Pressure and Local Governments' Behavior Based on the Quasi-Natural Experiment of Educational Authority Reform

【Authors】
XI Penghui, HUANG Xiaohong
【WorkUnit】
XI Penghui (National Academy of Economic Strategy, CASS, 100028)HUANG Xiaohong (Chengyi College, Jimei University, 361000)
【Abstract】

In the current period of massive tax and fee reduction, the issue of financial sustainability has caught much attention from across the society. Under the financial pressure to “tighten the belt”, the current evidence is relatively scarce and unsystematic to reveal behavior tendencies of local governments. Based on the quasi-natural experiment of educational authority reform in 2010, this paper studies the impact of financial pressure on local revenue and expenditure behavior. The empirical results show that in order to achieve the target of “increasing the government expenditure on education to 4% of GDP by 2012” put forward by the central government, local governments rushed to expand education expenditure. To meet the growing expenditure demand, the local government did not expand the tax base or strengthen tax collection and management measures, but sacrificed the increase of expenditure on other items, and after the goal was achieved, no compensation or improvement was made to the sacrificed items. This paper has important implications for China's fiscal reform and ongoing tax and fee reduction: first, without fundamental changes to the preference and basic pattern of fiscal expenditure, we should guard against the risk of sacrificing public services vital to people's life for the financial pressure caused by the reform; second, when reforming the fiscal system or tax and fee system that concerns the vital interests of local governments, appropriate transfer payment support should be given to avoid the worsening of regional inequality of public services in China.

 

JEL:E62, H52, H61

【KeyWords】
Government Expenditure on Education, Authority Reform, Expenditure Structure