Central-local relations at heart of fiscal reform

Analysts expect rollout of general strategy during next Party meeting in November

Reforming the central-local public finance relationship will be the centerpiece of the nation's pending fiscal reform, which is set to be discussed at a key Party meeting in November, analysts said.

China is expected to roll out a broad strategy of economic reform in the Third Plenary Session of the 18th Central Committee of the Communist Party of China. Fiscal and taxation reform lies at the heart of the strategy, and many hopes are being pinned on it.

Finance Minister Lou Jiwei said during the strategic dialogue between China and the United States in July that one aspect of the pending reform is to adjust the expenditure responsibilities of the central and local governments, especially in terms of increasing the central government's spending responsibilities.

"The disparity between local governments' revenue sources and spending responsibilities is the root cause of many economic problems in China," said Ma Haitao, dean of the School of Public Finance at the Central University of Finance and Economics.

"Scholars have called for a change in this system for a long time."

A 1994 overhaul of the nation's fiscal system greatly strengthened the central government's position. A new tax system with a value-added tax at its core laid the foundation for larger and more rules-based transfers to provincial governments. But the change also left China among the most decentralized countries in the world when it comes to government expenditures.

According to a report by the World Bank, local governments take half of the nation's fiscal revenue but are responsible for 80 percent of the spending, in areas ranging from healthcare, education and housing to urban development.

Underfunded local governments have spared no effort to increase their revenue, either by selling land or by issuing de facto government-guaranteed bonds.