Financial Resources, Local Government Debt Risks, and Fiscal Sustainability: A Coordinated Perspective

【Authors】

SUN Lin & ZHONG Rui

【WorkUnit】

【Abstract】

To explore the intensifying contradiction between local governments’ fiscal revenues and expenditures, rising debt risks, and the unsustainability of land finance, this study constructs a theoretical model examining the relationship between financial resources and local government debt risk. Using panel data from 29 provincial regions in China from 2006 to 2017, the study empirically investigates the impact of mineral resource reserves and value on local government debt levels, and tests the relationship between local government debt balance and the mineral resource exploitation rate. The findings indicate that an increase in resource value enhances local governments’ motivation for debt financing, thereby raising hidden debt balances and amplifying the debt risk. In addition, local governments facing debt repayment pressure adjust their resource utilization structure based on their resource endowments. For instance, with diminishing land acquisition opportunities, local governments with a higher hidden debt balance in areas rich in mineral resources significantly increase the exploitation rate of these resources. This study suggests that financial resources should be reasonably coordinated to restrain excessive borrowing by local governments exploiting their resource endowments. It also advocates promoting market-oriented transactions of resource rights and interests, expanding ways for government resource revenue to supplement financial resources, and regulating government behavior in obtaining resource income while strictly abiding by the ecological red line, so as to provide multiple guarantees for achieving long-term financial rebalancing.
The possible marginal contributions of this paper are as follows. First, it expands the research perspective on changes in local government debt levels to include mineral resource assets, enriching the study of the relationship between financial resources and government debt. Second, it constructs a theoretical model linking financial resources and government debt, and conducts an empirical analysis to mitigate the endogeneity issue between debt income and resource income. Third, by studying the relationship between financial resources and government debt risks, the study provides policy insights for optimizing the financial structure of local governments, improving fiscal sustainability, and advancing Chinese modernization based on the harmonious coexistence between humanity and nature in the next stage. Future research can continue to monitor the results of China’s market-oriented reform of factors and the development of a market-oriented system for resource and environmental factors. The study’s conclusions can be expanded in two ways: by verifying and extending the findings using a larger sample size, and by differentiating the financial transformation path of renewable resources, such as forests and grasslands, and the relationship with debt.

JEL: H27, H63, H71

【KeyWords】

Local Government Debt, Land Finance, Mineral Resources, Resource Revenue