An Exploration of the Fiscal and Political Determinants of Local Government Debt in Taiwan
Date Issued
2016
Date
2016
Author(s)
Liao, Wei-Jie
Abstract
Government debt management has become an important issue in recent years, as many governments all over the world are now facing bankruptcy due to high levels of debt. In Taiwan, local government debt has grown significantly over the last 20 years. In order to efficiently manage the debt problem, the main causes of local debt must be examined. This thesis collects theories and empirical studies related to public debt in order to classify possible causes of debt into fiscal determinants and political determinants. It is concluded that fiscal determinants of debt are acceptable, while political determinants should be well-controlled. In determining the causes of debt, this thesis collects panel data from all Taiwanese local governments between the years 1995 and 2014. By conducting multiple regression analysis, this thesis concludes that fiscal determinants, including the unemployment rate and fiscal size, have a significant effect on local government debt. The higher the unemployment rate, the more debt per capita there will be. Similarly, if the local government’s fiscal size is larger, debt per capita will be higher. As for political determinants, it is concluded that some are significant and some are not. The election year and the interaction variable, unemployment × election year, are not inherently significant. However, these two variables are significant when viewed in conjunction. In election years, local government debt might drop slightly. If the unemployment rate in election years is higher, the level of debt tends to be much lower. This illustrates that local government budgets and debts do not expand before elections. Because local governors are under the scrutiny of councilors, opponents, and the mass media, they dare not increase debt before elections. Other significant political determinants include social welfare expenditure and the chance of reelection. If a local government has high social welfare expenditure, it tends also to have a higher level of debt, because increased social welfare expenditure is usually funded by borrowing. During a governor’s last term, debt is likely to increase; having already occupied power for the maximum number of terms allowed, the governor no longer seeks to preserve the government’s fiscal situation. Alternatively, he/she may seek a higher position (for instance, the legislator or the president) by giving his/her voters more treats. The last part of this thesis discusses the debt ceiling. Analyzing data from the past 20 years, it is found that if local government debt approaches the debt ceiling, the growth rate of debt is likely to be lower. This implies that most local governments obey the debt ceiling rule. Nevertheless, some local governments, such as in Yilan County and Miaoli County, keep expanding their public debts despite having exceeded the debt ceiling. This thesis suggests that political determinants of debt should be controlled in the following ways. Firstly, if local governors want to increase social welfare expenditure, they should find a corresponding financial resource to pay for it. Because social welfare expenditure is not a self-liquidating expenditure, it should not be funded by borrowing. Secondly, there should be stricter fiscal rules for governors in their last terms, so that they leave a better fiscal situation for their successors. Last but not least, voters should be well-informed about debt, so that governors take voters’ perceptions into consideration and do not borrow money that they cannot repay.
Subjects
public debt
debt management
local finance
political budget cycle
debt ceiling
panel data
SDGs
Type
thesis
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