When local governments go bust

Updated: 2010-08-03 08:02

By Chen Weihua (China Daily)

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A radio reporter approached me in Bryant Park last week, asking for my view on the upcoming price hike of the MetroCard for New York's subway and bus systems.

Due to a mammoth budget shortfall, a 15-percent rise in the fare will be imposed. Two subway lines and 37 bus routes in the Big Apple have already been eliminated and over 700 bus workers, mechanics and station agents have lost their jobs. More austerity measures are expected in the coming days.

New York State, the nation's third-biggest state by both population and GDP, is so broke that it has also cut aid to public schools, reduced the number of police officers on duty and raised taxes on cigarettes in a bid to close its $9.2-billion deficit.

Governor David Paterson has been struggling for months to have state lawmakers pass a new budget for the coming year, but it still seems a difficult task.

New York is not alone. California, the nation's largest state in terms of population and economy and, in fact, the eighth largest economy in the world, has been facing bankruptcy or been on the verge of bankruptcy for years.

California's Governor Arnold Schwarzenegger is battling a deficit of more than $19 billion this year. According to Standard & Poor's, California's credit rating is the lowest among 50 US states. At "A minus", it is in the same rank as African nation Libya. Many other states, such as Illinois, Michigan, New Jersey, are facing similar situations.

Most of these states have to raise taxes, cut public spending and sell state assets in order to fill the shortfall. The disruption to public life has been enormous as vital institutions such as social welfare agencies, schools, police stations and firefighters are operating at limited capacity.

In Ohio's Ashtabula county, a judge even advised residents to carry a gun because the number of deputy sheriffs has been reduced by half due to budgetary constraints.

While the financial crisis has made many US states look like third-world nations, local governments with serious debt in China look totally different.

Liu Jiayi, auditor general of the National Audit Office, revealed in a report a month ago that local government debt of the 18 provinces, 16 cities and 36 counties had reached a staggering 2.79 trillion yuan, or about $410 billion, by end-2009.

Though many local governments have a deficit higher than their annual revenue, few have heard any local governments announcing curbs to their budgets citing bankruptcy, or complaining that their credit ratings have been lowered, resulting in higher borrowing costs.

Unlike their US counterparts, no government worker in China has lost his job, or has had salaries cut or been asked to take long no-pay leave due to local governments' cash woes.

All of them seem to rest assured that the superior governments will bail them out and write off their bad loans. In fact, this is not completely bad compared to the US scenario, since shutting down government agencies and cutting down on some vital public spending, such as on schools, the police force and firefighters, is just way too disruptive to the local society.

Having said that, careful scrutiny of annual budgets and spending by local governments in China is lacking, and they are often not transparent or detailed enough to the general public as well as financial experts.

Without a close watch on the situation, many localities facing huge deficits have continued to lavish money on building vanity projects, hosting extravagant banquets and organizing luxury leisure and business trips - irresponsible actions by any government.

China and the US can certainly learn from each other as far as dealing with local government bankruptcies are concerned.

The author is China Daily's chief correspondent in New York. He can be reached at chenweihua@chinadaily.com.cn

(China Daily 08/03/2010 page8)

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