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Vertical Fiscal Imbalance, Transfer Payments and Local Government Fiscal Sustainability

【Authors】
DU Tongwei, ZHANG Yishan & YANG Chengrong
【WorkUnit】
Jilin University, 130012.
【Abstract】

This paper analyzes the linkage mechanism between vertical fiscal imbalance, transfer payment and fiscal sustainability under the framework of Chinese-style fiscal decentralization, establishes the “effective fiscal space” indicator to quantify fiscal sustainability, and empirically examines how vertical fiscal imbalance affects the effect of transfer payment on fiscal sustainability. The results are as follows: (1) China's local governments have not yet established a positive feedback mechanism of primary finance on their debts, their current fiscal behaviors are unsustainable, but transfer payment as a financial supplement can increase the fiscal sustainability of local governments. (2) Despite the existence of “fiscal fatigue”, most local governments have sufficient space to establish a positive fiscal feedback mechanism through fiscal adjustment to achieve fiscal sustainability. In particular, local governments in the eastern region generally have more “effective fiscal space” and higher efficiency of fiscal expenditure than those in the central and western regions. (3) Although the vertical fiscal imbalance is not conducive to local fiscal sustainability, transfer payment has positive comprehensive effect on it and has played a role in reducing vertical imbalance. At the same time, the impact of transfer payment on local fiscal sustainability has a prominent threshold effect. When the vertical imbalance is small, the transfer payment has a negative impact on fiscal sustainability; otherwise it has a positive impact. Finally, from the aspects of deepening the reform of fiscal and tax system, designing and improving the local government debt system and transfer payment system, and improving the efficiency of fiscal expenditure, we put forward some policy recommendations.

JEL:H63, H77

【KeyWords】
Transfer Payment, Vertical Fiscal Imbalance, Fiscal Sustainability, Fiscal Space