Localities to be rewarded based on tax contributions

China has unveiled a new fiscal transfer payment incentive mechanism that rewards localities based on their tax contributions and revenue growth, in a bid to drive high-quality economic growth and enhance fiscal sustainability across the country's diverse regions, analysts said.

The country will leverage both incentives and constraints to reinvigorate local authorities to become more proactive, innovative and efficient in their pursuit of sustainable development, they added.

China has introduced an incentive mechanism to its transfer payment system, where a portion of the transfer payment funds will be allocated as rewards, targeted at localities that have made substantial contributions to the national tax base and experienced rapid revenue increases, the State Council, the country's Cabinet, said in late December.

The transfer payments — the unconditional allocation of fiscal funds from higher levels of government to lower levels — encompass both central-to-local and interprovincial allocations.

These payments serve as a critical policy tool for channeling resources from economically advanced regions to those less affluent, enabling the latter to enhance their capacity in providing essential public goods and services to their citizens.

According to the data from the Ministry of Finance, the volume of central-to-local transfer payments grew from 4.5 trillion yuan ($613.81 billion) in 2012 to 10.2 trillion yuan in 2024.

At the core of the new mechanism is a concerted push to fully mobilize the development enthusiasm of local governments, empowering them to take on a more prominent role in bolstering fiscal revenue and strengthening the quality of public service delivery, said Yang Zhiyong, president of the Chinese Academy of Fiscal Sciences.

This is not just about money; it's about cultivating a new mindset at the local level — one that prioritizes entrepreneurship, resourcefulness and pursuit of high-quality growth, Yang added.

Going forward, the Finance Ministry will increase financial support for localities facing fiscal difficulties, while also working to improve the overall balance of county-level fiscal resources. The ministry will also continue to provide financial incentives to local authorities for their efforts in delivering equal basic public services to migrant workers.

The ministry has also earmarked dedicated funding to spur local governments to drive high-quality economic growth within its transfer payment system starting in 2024.

He Daixin, a researcher at the Chinese Academy of Social Sciences, said that by setting aside this incentive fund, the government aims to motivate local authorities to expand their fiscal revenue base, enhance both the scale and quality of their fiscal resources, and ultimately achieve sustainable and sound growth of public finances.

In addition to incentives, the country will also strengthen budget performance evaluation to identify areas for improvement and make more informed, evidence-based choices about how to allocate fiscal resources next year, He said.