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Vertical Imbalance and Local Fiscal Discipline in China

Published online by Cambridge University Press:  24 March 2016

Gang Guo
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Abstract

This article examines local fiscal behavior in contemporary China against the backdrop of decentralized spending responsibilities and recentralized revenues. Vertical imbalance after the 1994 tax-sharing system reform, coupled with other features of the fiscal institutions, is not conducive to conservative local fiscal behavior. Moreover, a main driving force behind the expansion of local governments is the politically motivated intergovernmental transfer scheme. The center in effect “buys” political stability in sensitive areas while holding local leaders accountable for their tax efforts. A dynamic panel analysis of Chinese counties reveals that a million-yuan increase in general transfer payment and salary raise subsidies would add, respectively, fifteen and sixteen employees to the county government payroll, other things being equal. At the same time, increased subsidies from upper-level governments do not “crowd out” or significantly affect local tax effort. Additional dynamic panel data analysis at the provincial level produced similar findings.

Keywords

Chinavertical imbalancefiscal disciplinetax-sharing systemfiscal federalismintergovernmental transfersextrabudgetary fundsfiscal decentralizationhard budget constraintcommon pool
Type
Articles
Information
Journal of East Asian Studies , Volume 8 , Issue 1 , April 2008 , pp. 61 - 88
Copyright
Copyright © East Asia Institute 

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