The Fiscal Risk of Local Government Revenue in the People's Republic of China

25 Pages Posted: 25 Apr 2016

See all articles by Fan Ziying

Fan Ziying

Shanghai University of Finance and Economics

Guanghua Wan

Asian Development Bank Institute

Date Written: April 22, 2016

Abstract

Since the Tax Sharing Reform in 1994, the local government revenue of the People’s Republic of China (PRC) has faced downward risk problems. This paper reviews the fiscal and taxation reforms in the central and local governments of the PRC and focuses on evaluating the effectiveness of fiscal transfers. We find that, to a certain extent, fiscal transfers significantly promote the construction of local infrastructure. Earmarked transfers had an effect, but lump-sum transfers did not. Results showed every 1% increase in earmarked transfers to be associated with a 5% increase in local spending on infrastructure. These fiscal transfers also increased the size of local government spending such that a 1% increase of fiscal transfer would increase the ratio of local fiscal spending to gross domestic product by 1%. The risk of the local fiscal revenue sources was also assessed, and results showed that land finance, local government bonds, and fiscal transfers from the central government are not sustainable in the long term. The local fiscal system in the PRC needs to focus on improving local taxes in the future, such as the property tax.

Keywords: PRC fiscal risk, fiscal transfers, fiscal and tax reforms

JEL Classification: H71, H54, H68

Suggested Citation

Ziying, Fan and Wan, Guanghua, The Fiscal Risk of Local Government Revenue in the People's Republic of China (April 22, 2016). ADBI Working Paper No. 567, Available at SSRN: https://ssrn.com/abstract=2768580 or http://dx.doi.org/10.2139/ssrn.2768580

Fan Ziying (Contact Author)

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Guanghua Wan

Asian Development Bank Institute ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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