Evolution of Central-Local Fiscal Relations in China:A Theoretical Framework
Intergovernmental fiscal relations are pivotal in shaping a nation's political and economic systems.When de-signing and adjusting these relations,the central government of China must maintain institutional unity and central author-ity while balancing three key considerations:accommodating regional differences,enabling various government levels to perform their functions,and achieving multiple political and economic objectives.Consequently,adjustments in these fis-cal relations profoundly influence government behavior at all levels,shape government-market relations,and impact pub-lic goods provision,economic development,regional balance,and political stability.Extensive literature examines the characteristics of intergovernmental fiscal relations in China and their effects on government behavior and economic performance.However,most studies focus on specific aspects,lacking a systematic analysis or comprehensive theoretical explanation of the overall role of these relations.Indeed,China's long history of central-local relationships,vast geographic and demographic context,ongoing practice since the founding of the People's Republic of China,and the governance strategy of"giving full play to the initiative of both the central and local authori-ties"provide a robust foundation for theoretical innovations.This enables a relatively systematic explanation of the role of intergovernmental fiscal relations in China.This paper begins by outlining the core characteristics of intergovernmental fiscal relations and incorporates multi-level government decision-making into the study,establishing a theoretical framework suited to China's context.Using theoretical insights,the paper elucidates the inherent evolution logic of these relations,their impact on local government behavior,and their influence on economic growth during China's modernization process.The main conclusions are as fol-lows.First,theoretical research shows that the objectives of different government levels and external conditions determine intergovernmental fiscal relations over time,influencing government proactiveness.(1)The central government may in-crease local fiscal authority to promote economic development but reduce it to enhance leadership over local govern-ments.The impact of the central government's need to increase its fiscal revenue on these relations is uncertain.(2)These relations change with local government actions'output elasticity,cost factors,uncertainty,externalities,and public wel-fare preferences.(3)Local fiscal authority,the objectives and preferences of different government levels,and the charac-teristics of governmental actions influence government proactiveness.Second,the paper uses theoretical conclusions to explain the logic behind changes in China's intergovernmental fis-cal relations and their impact on government proactiveness.When deciding fiscal relations,the central government en-gages in a multi-objective decision-making process,which involves increasing local fiscal authority to stimulate local government proactiveness.However,increased local proactiveness can lead to issues like diminished central authority,market segmentation,and weakened central macro-control.These issues create pressure for reforms in fiscal relations,which in turn deeply influence the behaviors of central and local governments,affecting economic growth,government fi-nancial capacity,and central-local power dynamics.Third,the paper explains why and under what conditions intergovernmental fiscal relations drive economic growth in China.These relations form an elastic sharing and allocation system where the rules for benefit distribution between different government levels and between the government and the market are adjustable based on participants'goals,exter-nal conditions,and outcomes.This flexibility meets participation and incentive constraints,which is crucial for promoting economic growth.Based on these conclusions and against the backdrop of China entering a stage of high-quality development,the pa-per provides suggestions for future reforms in intergovernmental fiscal relations to continue leveraging their foundational role.
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