Download From China`s fiscal architecture to the outlook for reform under Xi

From China’s fiscal architecture
to the outlook for reform under
Xi Jinping
Christine Wong
Centre for Contemporary Chinese Studies
China Agricultural University
Beijing
October 22, 2015
Fiscal reform is a key part of the Xi
Jinping reform program
• Ambitious, comprehensive program mapped
out in the Decisions of the Third Plenum of
the 18th Party Congress in November 2013
• Aimed at
– National rejuvenation – harnessing
economic growth to be “smarter”
– Providing citizens with a happy life: clean
air, good schools, reliable health care, a
social safety net
– Fairness – access to equal opportunities
– Clean government
Minister Lou Jiwei has outlined a
comprehensive reform of the fiscal system
• Phase 1: public financial management
reforms – started 2014
–
–
–
–
Rein in extrabudgetary resources
Rein in local government borrowing
Improve transparency
Strengthen accountability, etc.
• Phase 2: reform of the tax system –
implement in 2015
– VAT reform, property tax, resource taxes, etc
• Phase 3 to start in 2016: intergovernmental
reform – a reallocation of revenues and
responsibilities
The current fiscal architecture
• China is a unitary state where local
governments play important roles
• The government has maintained a topdown, four-five tier structure of
administration since 1949
China’s administrative structure
中央
22 省 &
5 自治区
4 省级市
333 地区, 地级市
2853 县，县级市，市辖区
40,497 乡, 镇, 街道
China had a total of 43,714 local governments in 2013.
What is the intergovernmental fiscal
system?
The assignment of expenditure and
revenue responsibilities to different levels
of government
• A well-functioning intergovernmental
fiscal system channels resources to
each unit of government to enable the
financing of responsibilities
The fiscal system is highly decentralized local governments provide almost all services
National
total
Total budgetary expenditure
12595.3
Foreign affairs
33.4
National Defense
669.2
Public security
711.2
Education
2124.2
o.w. primary schooling
525.9
Junior middle school
353.7
Senior middle school
169.8
Social security and employment 1258.6
(billions RMB)
Subsidies to urban residents
basic pension scheme
Subsidies to rural pension
scheme
Subsidies to public employee
pensions
subsidies for pensions of
bankrupt enterprises
Local
(%)
85
0
3
83
95
100
100
99
95
252.7
97
93.3
100
284.9
90
17.9
100
National
total
73.7
30.2
66.6
27.2
69.9
724.5
86.3
110.2
365.7
Local
(%)
99
100
99
99
100
99
100
99
100
203.5
100
46.9
99
Environment Protection
819.6
89
Low income housing
448.0
91
job training subsidies
social relief
urban dibao
disaster relief
rural dibao
Health
Primary health centers
Public health
Health insurances
New cooperative
medical scheme (rural
health insurance)
Urban residents basic
medical insurance
Responsibilities are disbursed throughout the
administrative hierarchy
Local governments also finance most of the
investment in infrastructure
Local government share of total
expenditure and investment (%)
• Of the 3 million km of road
network, only 175,000 km
are national level roads
• Even for the major
highways, central funding
comprised less than 10%
of total investment through
the mid-2000s
• Responsibilities are
shared among all levels of
government
Mechanisms for matching resources
to responsibilities
The vertical distribution of revenue has been fairly stable
over past decade (% of total):
Background:
• Rapid growth of economy
– GDP grew from $1.2 trillion (USD) in 2000,
to 8.23 trillion in 2012
– Per capita income (RMB terms) grew 5.1fold during 2000-2012
• Government revenues and expenditures
grew even faster than GDP
– Budgetary revenues grew 8.8-fold (from
¥1.34 trillion to 11.7 trillion)
– Expenditures grew 7.9 times (from ¥1.59
trillion to 12.6 trillion)
While expenditure shares changed
dramatically
总支出的百分比
A sample of big rural programs
The vertical imbalance
% of national budget expenditures
1998
2002
Central
21
24
Provincial
-8
-8
Pref/ Municipality
-4
-5
County
-8
-12
2006
2010
28
-6
-6
-16
34
-7
-7
-20
• In aggregate, every level of local government faces a
budgetary shortfall (= revenue share - expenditure share)
• Central surpluses are financing some portion of
expenditures at all subnational levels through transfers:
to the provinces, prefectures, and counties
The mechanics
Resources are transmitted level-by-level downward
through the hierarchy
Central Government  Provinces
Provincial Government  Prefectures
Prefectures  Counties
....  Villages/Farmers
This is a unique, core feature of China’s decentralized
system
Treasury system works the same way: transfers are
sent from the central treasury to the provincial
treasury, from the provincial treasury to the
prefectural, and onward to the county treasuries.
Creation of the welfare state over the past decade has
brought much greater strain to the fiscal structure
Composition of revenues for an average
prefectural city (2013)
Special financial vehicles – the local
investment corporations (LICs)
• Set up as enterprises under municipal departments,
LICs are a workaround to the prohibition on local
government borrowing
– Local governments acquire farmland and transfer it to an LIC
– The LIC uses it as collateral to borrow from banks
– Funds are used to prepare the land for development
– Land is sold to developers
– Profits are turned over to the local government
• At the peak, there were more than 10,000 LICs and
existed in all cities and even some towns
• They operated “below the radar” of central authorities
until the fiscal stimulus program of 2008-2010
China has been working with a broken
intergovernmental fiscal system
• The intergovernmental system asks local
governments to do the impossible
– … but leaves the backdoor open for them to find
extra-budgetary resources and ways
• LICs were the natural outcome of strategy of
muddling through
– … tolerated because they produced results
consistent with broad objectives of government –
growth and infrastructure
• Accountability was very poor for these extrabudgetary, shadowy revenues
2014 National audit of land revenues found no
clear accounting standards used
• Receipts of RMB 20 trillion over 13 years,
even with massive under-reporting in most
years
• 2008 audit found under-reporting by more
than 70% during 2004-2006 in 11
cities/provinces
• Reporting on expenditures of land revenues
even messier – frequent diversions and
falsifications
Local government borrowing is out of control
• Local government debt came to national attention only
in 2010
• 2 nation-wide audits – 2011 and 2013, and recent NPC
report
Date
End 2010
End June 2013
End 2014
Increase (2010-6/2013)
Increase (6/2013-12/2014)
Partially
Direct Guarante
Columns Combine
Guarante
Debt ed Debt
1+2 Only
d Debt
ed
6.7
2.3
1.7
9.0
10.7
10.9
2.7
4.3
13.6
17.9
15.4
8.6
24.0
62%
50%
67%
41%
34%
Even through the national clampdown on local
borrowing, local government debt continues to grow!
Reform challenges for Xi Jinping
• The broken intergovermental fiscal system and the
use of back door practices were the systemic roots
that gave rise to a soft budget constraint for local
governments
• They in turn gave rise to the current problems of
declining capital efficiency, a mountain of local
government debt, and widespread corruption
• Fixing the intergovernmental assignment of
responsibilities and revenues is a prerequisite to
improving fiscal and a range of policy outcomes
Sequencing of reforms reflects
current worries
Problem was too much decentralization and loss
of control – over the macro economy, over
resource allocation
• Phase 1 is critically important: improve public
financial management to strengthen
accountability – a prerequisite to decentralized
control over resources
• Rein in extra-budgetary resources and regain
comprehensive oversight of fiscal resources
• Giving local governments legal power to borrow
while stopping back-door borrowing
PFM systems need to be strengthened
both at central and local gov’t levels
• Improve budget practice – introduce medium
term expenditure framework and accrual acc’ting
• Harmonize and upgrade government accounting
standards
• Intensive reporting and monitoring
• Limits not only for debt and deficit, but perhaps
also for PPPs, investment, expenditure growth
• More active review of budget and medium-term
expenditure framework by people’s congresses
as well as higher levels of government
What are the prospects for intergovernmental
reform under Xi Jinping?
Thank you!
© Copyright The University of Melbourne 2011