Financing China’s unprecedented infrastructure boom: the evolution of capital structure from 1978 to 2015

ABSTRACT

The authors examine the sources of the funds that have financed China’s infrastructure development since 1978. They define the five periods in which this development has taken place in terms of predominant financing: fiscal funds, build-operate-transfer (BOT), treasury bonds, the land financing, and local bonds. The system is characterized by a heavy reliance on debt financing and one-off revenues. These approaches have raised widespread concerns about fiscal sustainability in China. The authors explain why a shift towards the more conventional approach of fiscal funds is necessary.     

Tax Evasion and Auditing in a Federal Economy

This paper analyzes the relation between tax auditing and fiscal equalization in the context of fiscal competition. We incorporate a model of tax evasion by firms into a standard tax competition framework where regional governments use their audit rates as a strategic instrument to engage in fiscal competition. We compare the region’s choice of audit policies for three different cases: A scenario of unconfined competition without interregional transfers, a scenario with a gross revenue equalization (GRS) scheme and finally, a scenario with net revenue sharing (NRS), where not only the revenues from taxation but also the regions auditing costs are shared. Without regional transfers, fiscal competition leads to audit rates which are inefficiently low for revenue-maximizing governments. While in general GRS aggravates the inefficiency, NRS makes the decentralized choice of auditing policies more efficient.JEL Code: H26, H71, H77     

Reform or resist? The tale of two fiscal reforms in Spain after the crisis

ABSTRACT

This paper examines the two main fiscal reforms that Spain adopted after the global financial crisis: the law on budget stability (2012) and the creation of the country’s first independent fiscal institution: AIReF (2013). The analysis suggests that the Spanish government adopted an ambivalent strategy, displaying tendencies both to reform but also to resist by trying to keep or regain fiscal decision power for itself.     

Toward A Second-Generation Theory of Fiscal Federalism

Drawing on a wide range of literature and ideas, a new “second-generation theory of fiscal federalism” is emerging that provides new insights into the structure and working of federal systems. After a restatement and review of the first-generation theory, this paper surveys this new body of work and offers some thoughts on the ways in which it is extending our understanding of fiscal federalism and on its implications for the design of fiscal institutions.JEL Code: H77, H11     

Walking up the Down Escalator: Public Investment and Fiscal Stability

When growth-promoting spending is cut so much that the presentvalue of future government revenues falls by more than the immediateimprovement in the cash deficit, fiscal adjustment becomes likewalking up the down escalator. Although short-term cash flowsmatter, too tight a focus on them encourages governments toinvest too little. Cash-flow targets also encourage governmentsto shift investment spending off budget by seeking private investmentin public projects, irrespective of its real fiscal or economicbenefits. To deal with this problem, some observers have suggestedexcluding certain investments (such as those undertaken by publicenterprises deemed commercial or financed by multilaterals)from cash-flow targets. These stopgap remedies may help protectsome investments, but they do not provide a satisfactory solutionto the underlying problem. Governments can more effectivelyreduce the biases created by the focus on short-term cash flowsby developing indicators of the long-term fiscal effects oftheir decisions, including accounting and economic measuresof net worth, and, where appropriate, including such measuresin fiscal targets or even fiscal rules. JEL codes: O23, E62, H60, H54     

Information sharing,neighborhood demarcation,and yardstick competition: an empirical analysis of intergovernmental expenditure interaction in Japan

The Japanese government provides information on local fiscal performance through the Fiscal Index Tables for Similar Municipalities (FITS-M). The FITS-M categorize municipalities into groups of “similar localities” and provide them with the fiscal indices of their group members, enabling municipalities to use the tables to identify their “neighbors” (i.e., those in the same FITS-M group) and refer to their fiscal information as a “yardstick” for fiscal planning. We take advantage of this system to estimate municipal spending function. In particular, we examine whether the FITS-M help identify a defensible spatial weights matrix that properly describes municipal spending interactions. Our analysis shows that they do. In particular, geographical proximity is significant only between a pair of municipalities within a given FITS-M group, and it does not affect competition between pairs belonging to different groups even if they are located close to each other. This would suggest that the FITS-M work as intended, indicating that spending interaction among Japanese municipalities originates from yardstick competition and not from other types of fiscal competition.     

Dynamic fiscal policies and unemployment in a simple endogenous growth model

This paper analyzes the growth and employment effects of dynamic fiscal policies in an overlapping generations model with endogenous growth and imperfect labour markets. With balanced-budget policies, the modelled closed economy grows at a constant rate which is higher, the lower are the labour tax rate and the unemployment rate. Constant-flow budget policies are not feasible, while government Ponzi games are feasible only if economic agents have implausibly high savings rates. Furthermore, while constant-stock fiscal policies are sustainable, an increase in the debt-to-capital ratio is accompanied by higher taxes, a rise in unemployment and lower economic growth. JEL Classification E24 · J51 · H63 · O41     

Corporate Financing Decisions and Non-Debt Tax Shields: Evidence from Italian Experiences in the 1990s

Between 1995 and 1999, Italy experienced three episodes of fiscal reform during which different categories of non-debt tax shields were introduced, including a classical investment tax credit, a system of dual income taxation, and an investment tax credit restricted to equity financed investments. Using the balance sheets of a large sample of Italian companies, we construct a data set which allows us to evaluate the impact of the different fiscal interventions. We apply MacKie-Mason's (1990) method to study incremental financing decisions using discrete choice analysis. The analysis shows that the measures introduced were successful in reducing the advantage of debt financing relative to equity financing. We relate the findings to the current literature on the determinants of capital structure. JEL Code: G32, H25     

To Invest or not to Invest: A real options approach to FDIs and tax competition

Foreign investment decisions of firms are often characterized by investment irreversibility, uncertainty, and the ability to choose the optimal timing of foreign investments. We embed these characteristics into a real option theory framework to analyze international competition among countries to attract mobile investments when firms, after the investment is sunk, can shift profit to low tax countries by transfer pricing. We find that an increase in the uncertainty of profit income reduces the equilibrium tax rates, whilst lower investment costs or larger profits, counteracts the negative fiscal externality of tax competition leading to higher equilibrium tax rates. JEL Code H25     

Exploring Fit in Public Sector Organizations

Municipalities are complex organizational systems composed of policies, activities and resources. Using an in-depth case study analysis, the elements that make up the organizational systems of three municipalities in southern California are explored. This analysis shows how variation in fiscal health can be attributed to structural and managerial choices regarding the design and organizing of towns and cities. With a better understanding of both the internal and external fit of the organization, a city's managers may be able to make more careful decisions and improve day-to-day management and develop an area.     

Public—Private Partnerships in Ireland: Policy and Practice

Ireland's National Development Plan 2000–2006 includes a significant programme of public—private partnerships (PPPs). The Irish Government's policy on PPPs has been shaped to ensure that capital investments under PPP are not included when calculating key fiscal aggregates. This article traces the origins of Ireland's PPP programme and outlines the extent of PPP activity to date. It details how the PPP programme has failed to make an impact in terms of addressing Ireland's infrastructure deficit and examines three particular cases where the PPP model has been applied.     

Environmental Policy and Public Revenue with International Capital Mobility

In the presence of preexisting distortionary taxes, it is often argued that auctioned emission permits are preferable to non-auctioned permits, because the former generate revenues that may be used to reduce other taxes. This paper shows that when capital is internationally mobile, it may be optimal to use a combination of non-auctioned and auctioned emission permits, for both environmental and fiscal reasons. By letting the number of non-auctioned permits be a positive function of the amount of capital used domestically, they will attract capital to the home country. This may create environmental benefits in terms of reduced transboundary pollution and may lead to increased public revenue because the price of emission permits may increase and because the tax base may be enhanced. It is also shown that the optimal number of non-auctioned permits may increase as the marginal costs of public funds increase. JEL Code: D62, F21, Q28     

Quality assurance: The professional's role

How can professionals, especially those in the caring professions, feel confident that the service which they are providing for clients is of an acceptable standard? Any quality assurance programme needs the commitment of professionals.     

Consumer strategy in the public sector: Are you being served?

If your consumers had a choice, would they still choose you? Looking at your service through their eyes is a useful first step in working towards a positive answer to that question. Public sector managers need market sensitivity, whether or not they are monopoly suppliers of services.     

Comparability in IPSASs: Lessons to be Learned for the European Standards

Abstract

In 2013 the European Commission started addressing issues concerning public sector accounting harmonization across EU Member States, embarking on a project to develop European Public Sector Accounting Standards (EPSASs). Although acknowledging the indisputable reference of the existing International Public Sector Accounting Standards (IPSASs), it highlighted that IPSASs, as they were, could not be suitably applied in the EU context (European Commission, 2013a). IPSASs were considered as not covering specific important matters of public sector accounting, not showing enough stability due to the need of constant convergence with IFRSs, and offering several options that compromised comparability.

Comparability of public sector accounts across Member States is one of the main objectives of EPSASs (EUROSTAT, 2016, 2019), clearly established as a qualitative characteristic in the draft EPSAS Conceptual Framework (EUROSTAT, 2018). It is critical for EU economic and fiscal convergence that countries’ accounts allow for substantial comparison and standardized transition to the National Accounts (Jorge et al., 2014).

The IPSAS Conceptual Framework (IPSASB, 2014), meanwhile issued, sustains that adopting these standards would improve comparability of General Purpose Financial Reporting (GPFR), in this way strengthening transparency and accountability of public sector finance.

Given that, despite the above concerns, EPSASs are to be developed on the basis of IPSASs (European Commission, 2019), the purpose of this paper is to show that IPSASs are not an adequate reference for EPSASs in terms of allowing the desired comparability of countries’ accounts in the EU. It relies on evidence gathered from IPSAS-based financial reports prepared by some Agencies of the United Nations System and from audit reports of the UN Board of Auditors.

The research illustrates that IPSASs only allow for de jure comparability of financial reports at a very broad level. Their implementation and interpretation in practice (due to the options permitted and the judgement required) does not allow for de facto comparable GPFR. European standard-setters need to be aware that the comparability EPSASs need to address across EU Member States’ accounts must go beyond the one that is permitted by IPSASs – EPSASs need to stretch IPSASs harmonization to a higher level of standardization.     

Fiscal-monetary policy interactions in the presence of unionized labor markets

This paper develops a framework for studying the interactions between labor unions, fiscal policy, monetary policy and monopolistically competitive firms. The framework is used to investigate the effects of labor taxes, the replacement ratio, labor market institutions and monetary policymaking institutions on economic peformance in the presence of strategic interactions between labor unions and the central bank. Given fiscal variables, higher levels of either centralization of wage bargaining, or of central bank conservativeness are associated with lower unemployment and inflation. However the forward shifting of changes in either labor taxes or in unemployment benefits to labors costs is larger the higher are those institutional variables. The paper also considers the effects of those institutions on the choice of labor taxes and of unemployment benefits by governments concerned with the costs of inflation and unemployment, as well as with redistribution to particular constituencies. A main result is that, normally, higher levels of centralization and conservativeness induce government to set higher labor taxes. JEL Classification: E5 · E6 · H2 · J3 · J5 · L1     

Tobin meets Oates: solidarity and the optimal fiscal federal structure

We explore the implications for the optimal degree of fiscal decentralization when people’s preferences for goods and services—which classic treatments of fiscal federalism (Oates in Fiscal federalism, 1972) place in the purview of local governments—exhibit specific egalitarianism (Tobin in J. Law Econ. 13(2): 263–277, 1970), or solidarity. We find that a system in which the central government provides a common minimum level of the publicly provided good, and local governments are allowed to use their own resources to provide an even higher local level, performs better from an efficiency perspective relative to all other systems analyzed for a relevant range of preferences over solidarity.     

Sovereign risk premia: The link between fiscal rules and stability culture

There is a growing empirical literature studying whether permanent constraints on fiscal policy, such as fiscal rules, reduce sovereign risk premia. Nevertheless, it remains an open question whether these rules are effective genuinely or just because they mirror fiscal preferences of politicians and voters. In our analysis of European bond spreads before the financial crisis, we shed light on this issue by employing several types of stability preference related proxies. These proxies refer to a country's past stability performance, government characteristics and survey results related to general trust. We find evidence that these preference indicators affect sovereign bond spreads and dampen the measurable impact of fiscal rules. Yet, the interaction of stability preferences and rules points to a particular potential of fiscal rules to restore market confidence in countries with a historical lack of stability culture.     

Deep Habits,Price Rigidities,and the Consumption Response to Government Spending

This paper studies two frictions, good‐specific habit formation and price rigidities, used in theoretical models to generate the crowding‐in of consumption by expansionary government spending observed in the data. Both frictions generate countercyclical price markups, rising wages, and ensuing consumption–leisure substitution to overcome the negative wealth effect of the fiscal expansion. I demonstrate that while they independently support the rise of consumption, when used together the two frictions exert opposing pressures on the markup and the wage, weakening consumption–leisure substitution. Crucially, when price stickiness is high enough in an economy with “deep” habits, consumption is crowded out by the fiscal expansion.     

Do Macro-economic Crises Determine Accounting Value Relevance?

Abstract

We investigate whether the value relevance of earnings and book values in Turkey significantly changed across periods of financial uncertainty. Our enquiry differs from the mainstream literature that posits a unidirectional association determined by the ‘quality’ of individual firm accounts towards price. We find divergence in accounting value relevance components across the 1997–2012 period. Dominant value relevance shifts from earnings and negative interest rates in hyper-inflation, to the balance sheet after IFRS in 2005. On the other hand, the global financial crisis (GFC) is associated with diminished accounting value relevance for all variables. Policy issues are raised about value relevance consistency, the use of negative (low) interest rates as fiscal policies and the asymmetric application of market based valuations in emerging economies.