The Impact of Population Aging on Local Government Debt

Abstract

International evidence of Japan and European countries indicates that government debt burden could be aggravated by population aging in the long run. During recent years, population aging in China has been accelerating, with the debt burden of local government increasing simultaneously. Therefore, it is high time that the impact of population aging on local government debt should be taken seriously. However, until now there is still rare research upon whether China’s local government debt burden has been intensified by population aging.In view of this, firstly, this paper estimates the debt burden of each province from the perspective of interest-bearing debt of local government financing platforms. It covers both the explicit debt and the implicit debt, so the results are more accurate. Secondly, this paper analyzes the impact of population aging on local government debt using panel data of 30 regions in China（excluding Tibet）from 2010 to 2017. The empirical results show that the population aging has already worsen the debt burden of local governments to a considerable extent. What’s more, the panel intermediary effect analysis reveals that population aging could exert pressure on local government debt mainly from two aspects. On the one hand, fiscal expenditure on pensions would be more and fiscal revenue would be less, which will expand the numerator of debt-to-GDP ratio and push up the local government debt burden. On the other hand, economic growth slows down as population aging goes severer, which will whittle down the denominator of debt-to-GDP ratio and push up the local government debt burden.According to the prediction of the World Population Prospects（2019 Version）, the population aging rate of China will reach 16.9% by 2030, and reach 26.1% by 2050. Given that the risk posed by population aging to local government debt has been too serious to be ignored, this paper puts forward the following policies based on the mechanism analysis. Firstly, improve the pension system and reduce the burden of fiscal pension expenditures by increasing the size of personal pensions and increasing the return on investment of pension funds. Secondly, as local governments’ fiscal revenue will decline during the population aging process, it is difficult for them to accomplish the affairs arranged by the central government. It is necessary to further strengthen the central government’s authority and expenditure responsibility, so as to reduce the fiscal pressure of local governments. Thirdly, it is necessary to accelerate the innovation progress taking high-tech industries such as artificial intelligence as a starting point, so as to build up GDP and to dilute the debt burden, which can also achieve the purpose of reducing the risk of local government debt.