Social Sciences in China (Chinese Edition)

No.9, 2019

The Institutional Basis of the Growth in Local Public Debts—From the Fiscal and Financial Perspectives

(Abstract)

Mao Jie, Liu Pan and Lü Bingyang

The fiscal and financial systems and local public debts are inseparable. Theoretical research has found that under the weak financing constraints created by implicit financial decentralization, tax sharing has a positive stimulus effect on local public debt dependency and debt ratio. The mechanism behind it is that the increase in the proportion of tax sharing has enhanced the ability and motivation of local governments to expand the scale of debts, while the implicit financial decentralization has weakened financing constraints of local governments, making the motivation to expand the debt scale easier to achieve. The empirical results support the theory that the tax-sharing ratio is significantly and positively correlated with local public debt dependency and debt ratio, the coefficients on the interaction terms of tax-sharing ratio and financial decentralization are significantly positive, and the relationship between the tax sharing and the scale of local public debts is affected by macro tax rates and growth effects. The incentive effect of the fiscal and financial systems is the institutional reason for the continuous growth of local public debts, which is inspiring for scientifically controlling the scale of debts and preventing the debt risks.