Social Sciences in China (Chinese Edition)

No.7, 2019

Local Fiscal Governance: Give People Fish or Teach Them How to Fish—A Study of Fiscal Reform in Counties Directly Administered by the Province

(Abstract)

Liu Yongzheng, Jia Junxue and Ding Siying

Developing intergovernmental fiscal relations with clear power and responsibility division and improving local fiscal governance are the fundamental requirements for the modernization of the national governance system and governance capacity. Two logical approaches to fiscal governance are increasing local tax autonomy and expanding the scale of transfer payments; but each has its advantages and disadvantages. Seizing the opportunity of fiscal reform in counties directly administered by the province, our research employs a relatively unified analytical framework to analyze the impact of these two methods of local fiscal governance upon local government revenue and expenditure behavior and upon their fiscal self-sufficiency. As the findings show, the reform has improved local tax autonomy and the scale of transfer payment; that is, they put both modes of governance into practice at the same time. As one method of fiscal governance, “teaching people how to fish” or improving local tax autonomy can curb local governments’ moral hazard and cost-shifting behavior, improve local fiscal resources and control the growth of local expenditure, thus significantly enhancing local fiscal self-sufficiency. The other method of fiscal governance, “giving fish,” or increasing the scale of transfer payments, has the opposite effect—the negative incentive effect is dominant, which means that it has significantly weakened local fiscal self-sufficiency and therefore has impeded the improvement of local fiscal governance. These findings should prove helpful for the optimization and adjustment of the current fiscal relationship between the central and local governments.