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This paper Introduced the related incepts of local government debt and analyses the potential debt risk as well as the cause of it, finally proposes some suggestions about the large scale of local government debt. As we know, china’s economy Is mainly driven by “the troikas”, Investment, Import- export trade, and consumption. And the investment conducted by the local government accounts for a large percentage of the three main channels of economic gain, like the infrastructure investment, culture and education investment and so on.
Therefore the local government debt Is defined as a kind of deficit which Is caused by the imbalance of expenditure and income. With the increase of expenditure, that means the income of local government should increase symmetrically. Otherwise, when the government expenditure exceeds the income, it tends to cause the local government debt and even the bankruptcy of the local government If the amount of the debt Is large enough like Detroit filed for bankruptcy recently.
To be specific, the debt can be divided into two categories, the implicit debt and the explicit debt. The implicit debt primarily consists of the debt from financial institutions, including the mortgage loan, trust Investment etc. , which makes up the main part of china’s local The scale of china’s local government debt has extended In a very large degree these years. In 2011, the data from Chinese auditing administration showed the local government debt has reached 10. 7 trillion, and it’s predicted to be 14. 8 trillion In 2013.
But the question here is this official result is difficult to win people’s trust because the total debt Is believed to be undervalued and It’s hard for china’s central government to know the accurate amount of debt from local government nationwide. Due to the continuous increase of local government debt, the potential trust and troubles has been emerged. First, the local government debt expands the structure contradiction. These debts occupy a large amount of capital resource, which hinders the efficiency and the further development of local economy.
On the one hand, it gives rise to the distortion of the resource allocation. On the other hand, these debts may For example, a massive amount of capital has been Invested In the advancing building of infrastructures like airport, transportation network, high-speed rail, thus forming a huge gap between the fiscal Income and expenditure resulting from these unrealistic government investments and its low OFF government debt in the long term. The default of the local government debt is likely to trigger of the regional even the nationwide panic.
That is because the debt perhaps has already permeated among massive individual investors, who has a relatively low level to burden the potential default of government and always believe it’s impossible for any level of Chinese government to default. Besides, the large scale of debt is blowing up the risk in the financial system. In the past years, the local government has directly intervened in the financial market through holding or Unholy-owned local financial institutions, forcing the risk in the local government debt to transfer towards the financial market.
Once the risk erupts, these potential risks are big enough to cause the serious system risk in a lager wide. In order to solve these problems and potential default risk, we have to find the roots of the increasingly increased gap. Many scholars think the imbalanced income and expenditure can go back to the tax-sharing reform in 1993, which expanded the scope of local government administration and decreased the number of items as the source of local government income. That reform partially released the pressure of central government resulting from the less powerful control to the local governments.
However, added responsibilities and decreased source of income of local government make it hard to maintain the balanced of income and expenditure, resulting in other financial tools to offset such a huge gap. Therefore, the priority for China’s administration should make clear of the accurate scale of the government debt especially the implicit ones and adjust inter-government distribution system to solve the mismatch of responsibilities and income. That requires the central government to delegate powers to lower level and start to share more responsibilities for the necessary expenditure at the same time.
For instance, the local government has more power for taxation and is allowed to issue the local government bonds for Obtaining more chances to expand the scope of income. But all of these should be controlled in a certain scale which will not arouse the feeling of more tax and cost burden from individual enterprises and common people. Also, the government has to be more transparent to their budget. That means every level of government is expected to incorporate all items to the fill-covered budget management.
As a result, the public can easily see the specific use of these budgets and supervise the efficiency of expenditure, avoiding any corruption that lead to the unreasonable use of fiscal income. Besides, the local government should not only set the gain of GAP as their unique indicators for official performance but pay more attention to the welfare of individuals and provide a fairer platform for thousands of enterprise to compete. Conclusion: As the points showed above, the risk of Chinese local government debt as become one of the potential dangers in the development of china’s economy.