Regulating local government debt within growth trade-offs: a case study of China's fiscal consolidation policy

Local government debt is integral to China's fiscal framework. Faced with mounting debt risks, China's central government launched an expansive fiscal consolidation in 2016. Drawing on in-depth interviews and a case study, our research reveals that this measure signifies China's introduction of de facto fiscal regulations. These regulations have prompted local governments to navigate the complexities of growth objectives and fiscal mandates. Our findings suggest that traditional consolidation strategies are not always effective in the distinct local context of China. As a result, local budgets are increasingly dependent on revenues from land-transfer fees. Notably, the consolidation plan incorporates provisions that allow potential 'loopholes' for local authorities, potentially compromising its overall effectiveness. This study sheds light on the intricate dynamics of local debt management, the Plan's stipulated measures, and the overarching economic context, offering insights into the fiscal challenges faced by China.

Automated summary

Local government debt is crucial to China's fiscal framework. In response to increasing debt risks, the central government implemented a fiscal consolidation in 2016, introducing de facto fiscal regulations. However, traditional consolidation strategies may not always be effective in China's unique local context, leading to increased reliance on land-transfer fees for local budgets. The consolidation plan also includes provisions that could potentially allow loopholes for local authorities, compromising its overall effectiveness. This study highlights the complex dynamics of local debt management, the measures implemented in the Plan, and the fiscal challenges faced by China.