Social Sciences in China (Chinese Edition)

No.5, 2014

Research into the Responsiveness of Local Government Finance to Resident Preferences

(Abstract)

Yin Heng and Yang Longjian

Regional economic structures can help explain the extent to which local government finance responds to local residents’ preference, i.e., fiscal responsiveness. We establish a dynamic general equilibrium model to obtain a monotonic relationship between local fiscal responsiveness and the structure of fiscal expenditure structure, thus enabling fiscal responsiveness to be estimated. The share of welfare expenditure in local government expenditure is an effective proxy variable for fiscal responsiveness. Conducting empirical testing using data from a number of databases on county level finances and industrial enterprises above a designated size, we found that the higher the share of the private economy, the higher the proportion of personal income tax in local fiscal revenues, and the lower the degree of local market concentration, the higher will be the share of local finance welfare expenditure. This indicates that the structural factors in the regional economy generalized as the share of the private economy, the structure of local fiscal revenue and the degree of market concentration do exert a significant influence on the responsiveness of local finance. Giving the market a decisive role in the allocation of resources is an efficient approach to solving the problem of insufficient local fiscal responsiveness in China.