Local government debt must be tackled

The State Auditing Administration will audit local government debt but questions must be answered, especially how big the debt is and when will it be repaid, said an article in China Business News (excerpts below).

The auditing administration disclosed at the end of 2010 that the government's debt amounted to 10.72 trillion yuan ($1.70 trillion).

But some experts and officials estimate the real size of the debt is much larger.

Local governments pay their debts with revenues from tax and land transfers as the central government has not distributed enough revenue to their local counterparts.

Consequently, local governments resort to selling land and property prices are kept at an exorbitantly high level.

There are three disturbing phenomena concerning local government debt.

First, local governments regard urbanization as a process of increasing investment in fixed assets and infrastructure construction. Second, local government debt is always passed down to the new officials after their predecessors are transferred.

Last but not least, the current auditing system is not focusing on this debt.

To solve the problems, the central government must carry out tax distribution reform as soon as possible. In the meantime, local governments urgently need readjust their understanding of urbanization.

The central government should also include local government debt as an important index while evaluating the performances of officials.