Local government bonds are generally used for the construction of local public facilities such as transportation, communication, housing, education, hospitals and sewage treatment systems. Local government bonds are generally based on the tax capacity of local governments as a guarantee for repayment of principal and interest.
The debt for which the local government has the guarantee responsibility refers to the debt provided by the local government (including government departments and institutions) directly or indirectly, and when the debtor is unable to repay the debt, the government is jointly and severally liable for repayment. For example, government financing platform companies borrow money from enterprises. The difference between the local government's debt with repayment responsibility and the local government's debt with guarantee responsibility lies in that the former's debt repayment funds are borne by the government finance; The latter's debt repayment funds come from the expected income of the debt unit.
Advantages: Allowing local governments to issue bonds has undoubtedly solved the financial shortage of local governments. Local governments can raise funds more flexibly according to the development plan adopted by local people's congresses to solve the problems existing in development. More importantly, because local governments have the ability of self-financing and independent development, the relationship between the central government and local governments will be more mature, local people's congresses will be more active in supervising local governments, and China's political system will be further consolidated.
Disadvantages: A series of legal problems will arise when local governments issue bonds. If there is no strict restraint mechanism, some local governments will go bankrupt after excessive debt. However, China has not made clear provisions on the bankruptcy of government agencies. Once the local government goes bankrupt, what responsibility will the central government bear and what arrangements will the local people's congresses make? All these should be considered comprehensively.
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