The Economic Stabilization Effect of Local Government Special Debt under the Constraint of Fiscal Space
To prevent and dissolve local debt risk,China's new budget law,enacted in 2015,allows local governments to issue special debts,providing a formal financing channel for local investment.Over the years,Local Government Special Debt(LGSD)has become a critical source of infrastructure financing and a key tool for economic stabilization under proactive fiscal policies.Further exerting the growth effects of LGSD is critical for ensuring targeted and efficient fiscal policies.While LGSD has expanded in scale and quotas in recent years to support local construction and high-quality development,its economic growth effects have fallen short of expectations,as evidenced by the declining trend in infrastructure investment growth.The literature and surveys suggest that fiscal space may impact the effectiveness of LGSD.The current underperformance of LGSD is possibly linked to the fiscal space constraint,which is the leeway to implement fiscal policies without compromising the government's refinancing ability or debt sustainability.Earlier studies have noted the non-linear impact of LGSD but have not clarified the specific mechanisms at play.This study constructs a theoretical framework to analyze the economic growth effects of LGSD,deriving and decomposing the LGSD multiplier to arrive at the theoretical propositions based on the intrinsic interconnections of the main components of the local government budget.Additionally,an endogenous threshold panel model is used to empirically test the threshold effect of fiscal space on the LGSD's economic growth impact,with the threshold estimated as a byproduct,which should be taken seriously for the sustainability of LGSD and the local fiscal system.The marginal contributions of this paper are as follows.First,it reveals the link between fiscal space and the economic impact of LGSD by constructing a theoretical framework.Second,it provides empirical evidence for this relationship.Unlike other countries where fiscal space influences the fiscal multiplier via debt cost,this mechanism is not applicable in China where the pricing of LGSD is not fully determined by the market.Based on the unique characteristics of LGSD,this paper explores its overall growth effect,regional heterogeneity,and the effectiveness of the LGSD's capitalization policy.Third,it broadens the research perspective on local fiscal space by adopting a dynamic perspective and focusing on the interconnections among different local government budget components,offering a novel analytical framework for understanding the complexity of local fiscal space.Fourth,it provides new evidence on the possible transmission of local fiscal pressure into policy inefficiency,highlighting the moderating role of local fiscal space constraints.The challenge lies in constructing a theoretical model and conducting empirical analysis to capture the dynamics of local fiscal space constraints and the varied economic effects.Building on the Barro(1990)model,existing literature,suggestions from external audit experts,and stylized facts,the theoretical model was refined to formulate empirically testable propositions.Results indicate that the present LGSD multiplier is significantly constrained by local fiscal space because LGSD's economic stabilizing effects weaken when a local government's fiscal space exceeds the identified threshold.Currently,most Chinese provinces have exceeded this threshold,measured with different scopes,though economically strong provinces face fewer constraints,leaving some space for LGSD policy.To sustain LGSD's efficiency in economic stabilization,the following suggestions are made.First,the government could build an LGSD management system compatible with the high-quality development strategy.The quality of LGSD-funded projects should be enhanced by clarifying their functions,revenue expectations,and long-term benefits,and coordinating different public investment modes.Additionally,the range of LGSD investment and the scope of LGSD-funded projects should be reasonably expanded.Second,a positive feedback loop between fiscal space and economic growth should be fostered.Local fiscal space management needs to be strengthened to improve sustainability by coordinating various local fiscal resources.In terms of risk prevention,more attention should be paid to the general fiscal space.For policy efficiency,the government should coordinate financial resources to enhance policy targeting.In addition,the central and local fiscal departments should coordinate to better allocate fiscal resources.Third,the incentive and punishment mechanisms need to be built to stimulate local governments'prudent and active management of LGSD.For example,debt rules,including ceilings,growth limits,and exception clauses,should be developed as a flexible and binding system.Also,within the medium-term government budget framework,future and current fiscal resources should be better balanced,and local governments should pay more attention to fiscal sustainability and avoid overuse of future fiscal management capacity.
Local Government Special BondsFiscal SpaceEconomic GrowthDebt MultiplierEndogenous Threshold Panel Model
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