Summary:
Budget deviation is defined as the difference between the government's budgeted and final account values. Since the reform of the national tax sharing system, the Chinese government has experienced large budget deviations. Although greater budget deviations are generally seen in low-income countries compared with high-income countries, China's provinces reported average budget deviations as high as 9.38% from 2000 to 2014. This rate is not only much higher than those in developed countries but is also much higher than the rates reported in many developing countries. As a budget is a plan for revenues and expenditures, a gap between the budgeted values and final accounts is expected. However, if the gap is too large, it causes a series of problems. If excessive budget deviations persist, government budgets may be considered unreliable and nonauthoritative, and modern budget and fiscal systems could be challenged. These negative outcomes could greatly alter the effects of fiscal regulation on the economy. Therefore, it is important to understand the causes of revenue budget deviation and develop targeted measures to establish a modern budget system, improve the performance of fiscal management activities and even promote the modernization of national governance. Although the literature discusses the causes of budget deviations from the aspects of technology, economy and system, few studies focus on the impact of intergovernmental fiscal relations. Accordingly, this paper systematically analyzes the impact of intergovernmental revenue sharing on revenue budget deviation. First, it analyzes the institutional background of revenue sharing and budget management. On this basis, a simple static model is constructed and analyzed, revealing that against the background of the sharing method used widely by China's intergovernmental revenue division, a change in intergovernmental revenue sharing would have two opposite effects on budget deviation: fiscal pressure and fiscal expansion. The fiscal pressure mechanism means that the local government will face increased fiscal pressure as the ratio of shared fiscal revenue decreases. To alleviate this fiscal pressure, the local government must strengthen tax collection and management or vigorously develop its economy to increase its final revenue. This eventually leads to an increase in revenue budget deviation. The fiscal expansion mechanism means that the degree of tax effort decreases as the share of fiscal revenue decreases, resulting in a decrease in the final fiscal revenue. This eventually leads to a decrease in revenue budget deviation. Using the manually collected budget reports of provinces at the People's Congress, this paper collates the budgetary and final account data of 30 Chinese provinces from 2000 to 2013. Specifically, this paper considers the subprovincial governments as a whole and empirically analyzes the impact of revenue sharing on revenue budget deviation using a two-way fixed effect model. The results support the fiscal pressure mechanism: as the ratio of fiscal revenue sharing decreases by 1 percentage point, the revenue budget deviation increases by 0.3 percentage points. Further analysis shows that the impact of revenue sharing on budget deviation is not significant at the provincial level and decreases as the economic development level increases. This result holds through a full battery of robustness checks, which include changing the method of measuring revenue budget deviation and considering the effects of transfer payment and endogeneity, the influence of budget deviation in the previous period and the spatial influences of variables. This paper makes several main contributions. First, research on budget deviation is limited by the available data. Previous studies suffer from a lack of in-depth data or inadequate data acquisition. This paper uses subprovincial budget deviation data collected from the budget report of the Provincial People's Congress. Second, the literature mainly discusses the influences on budget deviation at a theoretical level and therefore lacks in-depth analysis of specific factors and corresponding empirical testing. This paper systematically explores and tests both the theoretical and empirical aspects of the influence of fiscal revenue sharing on revenue budget deviation. Finally, most studies have explored either fiscal pressure or fiscal expansion as the outcome effect of a change of fiscal revenue sharing on local government behavior. This paper considers both effects, which oppose each other, on budget deviation.
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