Local Fiscal Capacity Research Articles

The price of implicit guarantee: evidence from municipal bond markets in China

ABSTRACT In China, local government financing vehicles (LGFVs) have grown rapidly since the massive stimulus package in 2008. Due to the significant amount of funds allocated to public welfare infrastructure projects, an ‘implicit guarantee’ of debt repayment by local governments has emerged. This paper examines whether and how investors price this implicit guarantee, using a mixed cross-sectional fixed effects model, a generalized DID model, and placebo tests to investigate the hypotheses and identify the heterogeneity and robustness. The findings indicate that implicit guarantees do exist and are influenced by local fiscal capacity and previous guarantee behavior. Tightened regulations on hidden debt have increased the issuance spread of LGFV bonds, with the impact being more pronounced for regions with weaker fiscal and economic strength. Additionally, LGFVs with relatively lower administrative levels, stronger connections to public welfare-related business, higher explicit guarantees, and longer-term LGFV bonds are more influenced by the regulation.

A Geographical Approach to China’s Local Government Debt

Since the 2010s local government debt has boomed in China because the government relies on debt financing for infrastructure investment. The debt mainly consists of the issuance of Chengtou bonds and later local government bonds. Using data from more than 300 cities from 2009 to 2020, this article maps its spatial dynamics to further the understanding of intergovernmental relations in the studies on local government debt. We find that, from 2009 to 2014, most cities had large bond-issuing amounts. The dynamics were affected by the economic stimulus target set by the central government and the interjurisdictional competition in borrowing among local governments. After 2015 the cities with better economies issued more bonds because the central government tried to match local government debt with local fiscal capacity to maintain financial security. The spatial dynamics show the increasing intervention by the central government in local fiscal income and expenditure, reflecting fiscal centralization. Fiscal centralization did not effectively contain the financial risk in the less-developed cities. Motivated by the competition, the less-developed cities did not use bonds efficiently and had higher ratios of bond issuance to fiscal income, experiencing higher financial risk.

Policy instruments facilitate China’s COVID-19 work resumption

Governments worldwide have announced stimulus packages to remobilize the labor force after COVID-19 and therefore to cope with the COVID-19-related recession. However, it is still unclear how to facilitate large-scale work resumption. This paper aims to clarify the issue by analyzing the large-scale prefecture-level dataset of human mobility trajectory information for 320 million workers and about 500,000 policy documents in China. We model work resumption as a collective behavioral change due to configurations of capacity, motivation, and policy instruments by using qualitative comparative analysis. We find that the effectiveness of post-COVID-19 recovery stimulus varied across China depending on the fiscal and administrative capacity and the policy motivation of the prefecture. Subnational fiscal and procurement policies were more effective for the wholesale and retail sector and the hotel and catering sector, whereas the manufacturing and business services sectors required more effort regarding employment policies. Due to limited prefectural capacity and wavering policy motivation, the simultaneous adoption of fiscal, employment, and procurement policy interventions endangered post-COVID-19 work resumption. We highlight the necessity of tailored postcrisis recovery strategies based on local fiscal and administrative capacity and the sectoral structure.

Can Florida’s Coast Survive Its Reliance on Development?

Problem, research strategy, and findings With its densely built coastline and economic and fiscal reliance on development, Florida is an extreme case of how climate change threatens both the built environment and urban land governance. We conducted one of the first statewide assessments of how sea level rise will affect Florida’s municipal revenues. We paired this with a statewide survey of coastal planners and managers to assess how they have been funding climate adaptation. We found that more than half of Florida’s 410 municipalities will be affected by sea level rise, exposing on average almost 30% of local revenues. Yet, though climate impacts will significantly stress local fiscal health, we found no relationship between cities’ prioritization of climate adaptation and their fiscal exposure. Takeaway for practice Municipal revenues will become increasingly eroded by climate impacts and market responses. More fiscally affected municipalities are comparatively smaller, Whiter, and wealthier. They may be better able to invest in near-term adaptations, but long-term sea level rise could erode local fiscal capacity to maintain infrastructure and protect local tax bases. These municipalities’ fiscal health and decline will affect regionwide housing markets, gentrification, and displacement. These dynamics underscore the need for stronger regional climate assessments and land and tax governance to overcome challenges facing coastal and near-coastal municipalities.

The Role of Property Assessment Oversight in School Finance Inequality

This paper explores an under-studied channel for school finance inequality: property assessment. School districts have historically relied on local tax revenues (typically property taxes) to fund schools, which can generate disparities in funding across districts. Many states passed school finance reforms that give more state funding to poorer districts. These formulas typically discourage school districts from offsetting state funding by reducing local tax rates (“crowd out”). However, many reforms have not adequately addressed another source of inequality: property assessment accuracy and equity. Moreover, state reform can unintentionally subsidize property underassessment. We analyze a state government intervention to address property assessment inequities within and across school districts. We use difference-in-differences and county- and school district-level administrative data to find the intervention boosted assessments by 32 percent. Assessment equity improved substantially and local property revenues temporarily increased by 17 percent. Local fiscal and institutional capacity played a role in assessment inequity pre-reform. Our results suggest that underassessment can compound funding inequality across districts in states that rely on property wealth to fund schools. Therefore, effective state oversight in property assessments is needed to ensure the integrity of funding systems that distribute state funding to districts on the basis of their assessed property wealth.

A study on the “excessive” emergency behavior of local governments in the context of the covid-19 epidemic – Based on the perspective of phenomenological sociology

The “excessive” emergency behavior of local governments at all levels in China has caused adverse social impacts during the covid-19 epidemic prevention and control period. From the perspective of phenomenological sociology, this paper uses the method of case study to analyze the motivation of “excessive” emergency behavior in the process of local government epidemic prevention, and understand the “real cause motivation” and “purpose motivation” behind such behaviors. The study found that the “excessive” emergency behavior of local governments is more caused by irrational factors from personal, social risks and local fiscal capacity.

Evaluating local fiscal capacity and fiscal effort of Turkish local governments: Evidence from spatial panel data analysis

Evaluating local fiscal capacity and fiscal effort of Turkish local governments: Evidence from spatial panel data analysis

Can decentralization lower poverty? Cambodia’s Commune and Sangkat Fund

• Decentralizing expenditures can lower poverty. • Using three separate data sets we find Cambodia’s Commune and Sangkat Fund (CSF) program significantly lowered poverty. • Investment spending based on local information and local representation of preferences was key to the program’s impact. • At just 3% of the national budget, the CSF funds were used to created local infrastructural capital stock. • The results support Oates’ iconic decentralization theorem in a Cambodian context. We study a policy, mandated by Cambodia’s decentralization laws, that provides central funding to the lowest tier of subnational administration, the 2002 Commune Sangkat Fund (or CSF). A large interdisciplinary literature points to the difficult path from decentralization to poverty reduction. For example, fiscal capacity - the ability to raise taxes locally – is deemed necessary for local public goods to be reliably provided. But in poor countries local fiscal capacity simply cannot be built unless there is an income base to tax, which, in turn, requires poverty to be eradicated. Using three separate data sets we find three distinct pieces of evidence about the program’s impact. First, the program reduced poverty at the initial as well as subsequent stages. Second, we find evidence that investment into rural infrastructure can be pro-poor. Third, the program, which amounted to a mere 3% of the national budget, created substantial capital stock over the years in communes and villages and delivered large returns measured in poverty reduction. A message from this study is that when the choice and design of projects are informed by local knowledge and local representation, investment can reduce poverty.

The Fiscal Cost of Conflict: Evidence from La Violencia in Colombia

This paper studies the effect of internal conflict on local fiscal capacity using evidence from Colombia’s political conflict in the mid-20th century, better known as La Violencia. Following a difference-in-differences strategy, I find that internal conflict has negative long-term consequences in local fiscal capacity. More precisely, municipalities affected by La Violencia experienced an average reduction of 10.3% in their tax revenue and a fall of 2.8 percentage points on their ratio of taxes to total revenue. Effects lasted for more than a decade and are only partially explained by a population and economic activity downturn. These results are consistent with previous evidence indicating a negative effect of violence on tax collection effciency at the local level.

Impact of Environmental Regulation on Scientific and Technological Competitiveness of Resource-Based Cities in China-Based on Panel Data of 33 Resource-Based Cities.

After the economy enters a “new normal” era in China, resource-based cities are under pressure in terms of transformation, upgrading and sustainable development. This paper uses the panel data of 33 resource-based cities from 2008 to 2018 to empirically analyze the impact of environmental regulation and innovation compensation on scientific and technological competitiveness. The results show that there is a positive U-shaped relation between environmental regulation and scientific and technological competitiveness. This means that when environmental regulations exceed a certain level, continuing to increase regulations will significantly enhance technological competitiveness, but most samples are still on the left side of the turning point. At the same time, the labor productivity and fiscal capacity of non-agricultural industries in the region may have a strong regulatory effect. In a region with higher labor productivity in non-agricultural industries or stronger local fiscal capacity, environmental regulation is more likely to reflect the attribute of “innovation compensation” and advance scientific and technological competitiveness. At this stage, we should optimize the trans-regional compensation mechanism for resource-rich regions, increase investment in pollution management and ecological protection and impose stricter admission standards on industrial projects. Besides, skilled laborers should be cultivated and innovation and entrepreneurship be supported to realize the green and sustainable development of resource-based cities in the new era.

Formula-Based Approach in Allocation of Specific Allocation Grants for Infrastructure (DAK Fisik): Case of Education Provision

The paper presents the top-down (formula-based) approach in allocation of specific purpose grants for infrastructure (DAK fisik) in education by considering the needs of infrastructure in education. First, we estimate the needs of education infrastructure by calculating the gap between current condition of infrastructures and the minimum required infrastructures in education. Then, we translate the needs into necessary costs for education per region. After that, we simulate the financial scenario for the necessary costs using specific allocation grants in hierarchical, temporal and regional dimension. We also consider the local fiscal capacity and indicators on achievement of local governments in education for the distribution on DAK Fisik for FY2021 and onwards. Finally, we provide potential implication of formula-based approach as a top-down planning and budgeting for DAK Fisik.

The territorial fiscal gap in Colombia

This paper presents an estimation of expenditure needs and fiscal capacity of Colombia's municipalities and departments in 2014. We use standard per capita norms to estimate the spending needs and data envelopment analysis for the local fiscal capacity. The results show that: (i) there are high horizontal fiscal disparities in Colombia, with greater incidence in municipalities than in departments; (ii) these disparities favour more developed territories; and (iii) there is evidence of a centre‐periphery pattern in the horizontal fiscal disparities, causing central regions of the country to have a lower imbalance between expenditure needs and fiscal capacity.

Factors influencing the extent of local public spending through contracting-out and intermunicipal contracting in New York: focusing on institutional constraints, histories, and fiscal capacity

ABSTRACTThis research considered levels of public service spending according to the alternative service arrangements, and examined how the property tax cap as an external constraint, local histories, and local fiscal capacity are related to the spending in the context of the state of New York. This study provides empirical evidence that the property tax cap positively influenced local spending through contracting out, while the same variable negatively affected the spending through intermunicipal contracting. Second, the previous level of public spending was positively associated with the current level of public spending through contracts with other municipalities, but this is not the case for contracts with nongovernmental providers. In addition, in deciding the extent of public spending through contracting out, local government officials were influenced by the factors of fiscal capacity, indicated by budget solvency and tax revenues.

Hardening Budget Constraints: A Cross-National Study of Fiscal Sustainability and Subnational Debt

ABSTRACTThis study explores the financial sustainability of subnational governments in four different countries. Scholars argue that subnational fiscal capacity helps local governments deliver better public services and provide public goods, which in turn helps to promote economic growth. While administrative control by the central governments contributes to reducing moral hazard from the soft budget constraints, bottom-up strategies to manage fiscal profligacy also need attention. The study first provides understanding about the characteristics of central-local governance and management of subnational government debt of each country. Then, we test our hypotheses regarding local fiscal capacity and administrative control, including political-economic factors that may affect debt spending by local governments. Our findings show that subnational fiscal sustainability improves when the central governments have clear rules to intergovernmental transfers in place and more (market) liberal policies, meanwhile when subnational governments have a more fiscal capacity and less intergovernmental transfers they are able to manage their debt more soundly.

Which Chinese cities are more inclusive and why?

China's household registration system allows local governments to control migration by limiting migrants' eligibility to local public services. Many cities exclude migrant residents from important social benefits, which reduces labor mobility and contributes to the socioeconomic gap between migrants and urban natives. This study measures the extent of China's local migration restriction from the perspective of inclusive provision of public services and explains cross-city disparities. We define urban inclusiveness as the extent to which migrants can access social benefits provided locally and construct an urban inclusiveness index using factor analysis. We find significant cross-city differences in urban inclusiveness toward migrants. Statistical analyses suggest that local fiscal capacity and labor demand, instead of cultural tradition, are the major determinants of urban inclusiveness. We further use the gap between the inclusiveness toward high- and low-skilled migrants to measure local skill-based migration selectivity. We find that more developed cities, i.e., cities with larger populations, higher levels of gross regional product per capita, and greater shares of industrial sector, are more selective based on migrants' skills, while cultural openness does not help bring down skill-based selectivity. Our research suggests an instrumental view of migrants in China's urban policy that contributes to social inequality and the lack of labor mobility, which can restrict China's development in the long term.

The impact of intergovernmental transfers on local revenue generation in Sub-Saharan Africa: Evidence from Tanzania

Do intergovernmental transfers reduce revenues collected by local government authorities (LGAs)? There is already a well-established body of literature in public finance, which argues that intergovernmental grants “crowd out” local revenues. Most existing studies, however, explore the fiscal implications of intergovernmental transfers in high-income countries where sound fiscal systems are taken for granted. In this paper, I explore the impact of intergovernmental transfers on local revenues in sub-Saharan Africa, a region where local fiscal capacity is limited and endogenously determined by financial support from international donors and the central government. I argue that in places where the existing capacity of LGAs to administer tax collection is weak and political costs of enforcing taxation are low—which are perennial features of many rural districts in Africa—intergovernmental transfers facilitate local revenue generation instead of undermining it. Analyzing newly available quarterly fiscal data on local revenues in Tanzania, I show that intergovernmental grants improve the mobilization of local revenues, and also that the positive effect of fiscal transfers on local revenue collection seems to be more pronounced in rural districts.

Drink what you can pay for: Financing infrastructure in a fragmented water system

The article investigates the relationship between environmental violations and water utility infrastructure investment in the Houston metropolitan area through a lens of institutional fragmentation. Special purpose water districts are highly capital-intensive service jurisdictions, which makes them extremely dependent on local fiscal capacity. Fiscal capacity is also important for a water district’s ability to respond to performance failures, particularly regulatory violations. Resource base, however, is unevenly distributed between special purpose water districts in the highly fragmented Houston metro area. Therefore, while capital investments may significantly covary with fiscal capacity, not all water districts are expected to be capable of making needed infrastructure investment when problems arise. There are two major policy-relevant findings that we offer in the article. Institutional fragmentation in relatively more affluent areas does not impede the ability to invest in capital infrastructure related to both service pressures and regulatory violations. However, such ability is limited in relatively less affluent areas, where the fiscal capacity to respond to service delivery problems is limited.

Increasing Government Social Expenditure and Intergovernmental Fiscal Relations in China

In 2016, the Chinese government spent about 37% of total government expenditure on social policy areas. With demographic changes and new government initiatives, this spending is likely to increase further. Local fiscal capacity is insufficient to fulfil this responsibility. To remedy, two recent policy initiatives have been introduced including reallocating expenditure responsibility between central and local governments and encouraging the entry of the private sector to share some outlays of the social programmes.

Estimation of Local Fiscal Extractive Capacity in Guangdong Province and Analysis of Influencing Factors—An Empirical Study Based on 21 Prefecture-Level Cities

Fiscal Extractive Capacity is an important component of national capacity, and its inadequacy will drive local governments to raise funds through non-standard channels and bring negative effects on national governance. In this paper, we define the fiscal extractive capacity through the fiscal extractive scale, fiscal extractive degree of self-sufficiency and fiscal extractive sustainability, and we use the fixed-effect model and factor analysis method to calculate and draw the empirical analysis of the fiscal extractive capacity of the prefecture-level cities in Guangdong Province from 2008 to 2014, and the results show that fiscal expenditure decentralization, economic factors and population factors have significant impact on fiscal extractive capacity. Therefore, it is suggested that we should divide the fiscal power of the prefectural city reasonably, promote the optimization and upgrading of the industrial structure, and strengthen the financial guarantee to the prefectural government through the reform of the transfer payment system.

The Relation of Fiscal Decentralization, Regional Finance and Social Justice for the Local Development of Indonesia

This study aims to analyze the relationship between fiscal decentralization, fiscal capacity, financial independence and financial expenditure areas in achieving social justice. In this case, the East Java Province Indonesia is supported by the existence of local government district / municipality became the main object of study during 2010 -2014. The needed data are such as; financial balance data, regional revenue, the amount of local spending and social justice data on people's lives. Data analysis method used is Partial Least Square (PLS). The results provide the conclusion that the implementation of the fiscal decentralization policy gives positive and significant impact on local fiscal capacity. Fiscal capacity gives positive and significant impact on the local financial independence. Local financial independence gives positive and significant impact on the structure of the shopping area. The structure of local government spending has a significant effect on the achievement of social justice areas. In this case, the fiscal capacity and financial independence have no direct impact significantly on the achievement of social justice in the various districts / cities in East Java. In addition, this study also provides important conclusion that there is a significant indirect effect of fiscal decentralization on social justice through local fiscal capacity, local financial independence and the structure of local government spending.