China’s Local-Central Intergovernmental Fiscal Relations*

China Economist - - Articles - Yang Zhiyong National Academy of Economic Strategy, Chinese Academy of Social Sciences (CASS) * This paper is based on the author’s previous research and the recent situation of adjustment in China's intergovernmental fiscal relations. Corresponding aut

Abstract:

For a large country like China, the handling of intergovernmental fiscal relations must create compatible incentives to central and local governments. China initially created a fiscal management system characterized by tax sharing in 1994, basically meeting the needs of its socialist market economic system. Yet further improvements must be made to the assignment of administrative authority and expenditure responsibilities, revenue allocation and the fiscal transfer payment system. In handling intergovernmental fiscal relations, great attention must be given to the system’s stability to give play to its function of incentives and restraints. China must create a hierarchical fiscal management system in line with its modern fiscal system. According to the requirements of this system, China should further standardize the division between administrative authority and expenditure responsibilities, standardize the division of government revenues, formalize a fiscal transfer payment system, and develop a hierarchical fiscal management system encompassing the sharing of tax, rents and profits.

Keywords:

fiscal management from a large country perspective, intergovernmental fiscal relations, fiscal system

JEL classification: E62, H77, O23

1. Introduction

The Third Plenary Session of the 18th CPC Central Committee in 2013 set the goal of China’s fiscal reform to establish a modern fiscal system. “Establishing a system whereby authority of office matches responsibility of expenditure” is one of the three major priorities. On June 30, 2014, the Political Bureau of the CPC Central Committee deliberated and adopted the Plan for Deepening Overall Reform of the Fiscal and Tax Systems, which calls for adjustments to local-central fiscal relations. Specifically, the reform should rationalize the allocation of localcentral fiscal revenues in line with expenditure responsibilities.

In adjusting local- central fiscal relations, the ultimate goal is to create a hierarchical fiscal management system ( Yang Zhiyong, 2015). China’s tax sharing reform in 1994 laid out the basic framework for today’s local-central fiscal relations and was carried out in tandem with tax reform and the creation of a tax collection and management system. Over the past two decades, China’s fiscal prowess grew from strength to strength, with fiscal revenue as a percentage in GDP up from around 10% to 22.5% in 20151. Strong fiscal resources empowered government r e g u l a t i o n i n a m a r k e t - b a s e d e c o n o m y.

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