Trace of the New Round of Chinese Fiscal Reform
China's Leading Government Think Tanks on Objectives and Strategies for the New Round of Chinese Fiscal Reform
Recently, I came across the Reuters report titled “China's key plenum aims to fix decades-old tax revenue imbalance.” which discusses the fiscal reform direction for the upcoming third plenum. And that inspired me to do a little extra research about this topic. For today’s episode, I will present the views of three experts from leading Chinese government think tanks on the direction of this new round of fiscal reform. By examining their statements, we can develop a framework for understanding the direction of the upcoming fiscal reform. Hope that’s helpful for my readers.
The fiscal reform is not coming from nowhere. Since the 1994 tax reform, China has established a tax-sharing system between local and central governments. For a long time, China has faced an imbalance between the revenue and expenditure of the central and local governments. The proportion of local government fiscal revenue in the national fiscal revenue has long been maintained below 55%. In contrast, the fiscal expenditure undertaken by local governments has long been sustained above 80%. This disparity has led to the accumulation of local debt and other derivative problems. China is embarking on a new round of fiscal reform. This March, Qiushi, the flagship journal of CPC, published an article by Chinese Minister of Finance Lan Foan. In the last paragraph of his article, he talked about some key targets of this new round of fiscal reform:
research on optimizing the tax structure, improving the local tax system, perfecting the green tax system, and promoting the reform of non-tax revenue. Study and improve the fiscal transfer payment system, and explore the establishment of an incentive and constraint mechanism for transfer payments that promotes high-quality development. Study and improve the fiscal system, accelerate the reform of the sub-provincial fiscal system, and improve the system that matches fiscal powers and spending responsibilities.
Secretary of the University of Chinese Academy of Social Sciences (GSCASS) CPC Committee: Fiscal reform should put economic recovery first.
Gao Peiyong, Secretary of the Secretary of UCASS (GSCASS) CPC Committee, published his article in Guangming Daily.
He believes fiscal and taxation system reform should primarily aim to consolidate economic recovery while continuously promoting the effective enhancement of the economy's quality and the reasonable growth of its scale. To further accelerate the current economic recovery process, the reform should focus on addressing the concerns of the market and local governments. The emphasis should be placed on stabilizing the expectations of these key players while stimulating their inherent motivation and innovative vitality.
To fully implement the tax-sharing fiscal management system, it is crucial to follow certain principles. First, the focus should be on dividing the sources of tax revenue between the central and local governments rather than simply splitting the collected tax revenues. Second, a hierarchical fiscal management system should be adopted, where fiscal responsibilities are divided among different levels of government, as opposed to a single-level management system. Third, the tax authority should be highly centralized, while the financial authority should be less concentrated.
To achieve these goals, the reform should prioritize two key areas. The first is to improve the local tax system, enabling local governments to have a more stable and predictable source of revenue. The second is to enhance the central government's transfer payment system to local governments, ensuring that resources are allocated efficiently and equitably among different regions.
By focusing on these aspects, the reform aims to create a more comprehensive and effective local fiscal revenue and expenditure system. This will provide local governments with greater clarity and certainty regarding their economic development plans and fiscal resources, allowing them to make more informed decisions and foster sustainable growth in their respective regions.
Dean of the Chinese Academy of Fiscal Sciences: The Goal of Reform-Enhancing Central Gov’s Capacity
For more details of this upcoming reform round, Liu Shangxi published a fiscal reform target path review in Tsinghua Financial Review in late April, introducing the governance capacity angle. Liu is the Dean of the Chinese Academy of Fiscal Sciences, a think tank of the Chinese Ministry of Finance.
From his perspective, previous fiscal reforms primarily focused on economic dimensions, aiming to establish a market economy and promote economic development. In contrast, current reforms aim to enhance national governance capacity, focusing on promoting high-quality development and mitigating risks. The reform path involves governing power, constraining public power through fiscal and taxation measures, and safeguarding civil rights. He also proposed reforming the power dynamics between the central and local governments by modifying the fiscal system.
Fiscal and taxation system reform from the perspective of national governance should have new approaches. It should be promoted in an integrated and coordinated manner, and it is necessary to construct a "one body, two wings" framework. This means taking the central-local fiscal relationship as the "body" and the budget system and taxation system as the "two wings," avoiding the fragmentation of fiscal and taxation system reform. Advanced systems require advanced management methods, tools, and technical support. Fiscal and taxation system reform must pay attention to the construction of modern fiscal infrastructure to avoid falling into the predicament of "a small horse pulling a big cart," where advanced systems are difficult to operate.
He also suggested five aspects of reform to enhance the governance capacity of the central government:
Promote a new round of fiscal and taxation system reform under the central-local two-level governance framework.
Advance the reform in a coordinated and integrated manner according to the "one body, two wings" framework, preventing individual actions and "fallacy of composition" in the reform process.
Improve fiscal macro-management capabilities by focusing on changes in public risks and preventing the hidden accumulation of public risks.
Improve the organizational structure to match the positioning of modern finance.
Strengthen the technical support of the modern fiscal system based on digitalization.
Dean of Central University of Finance and Economics: The new round of reform should clarify the relationship between the government and the market
Ma Haitao, Dean of Central Univerisity of Finance and Economics, also discussed it in the 21st Century Business Herald report. He said:
The new round of fiscal and taxation system reform is not just a reform in one aspect, such as budgeting, taxation, or even intergovernmental fiscal relations, but rather a systematic and comprehensive reform. Looking back at history, the essence of the "tax-sharing system" reform 30 years ago was to clarify the fiscal relationship between the central and local governments. In contrast, the current new round of fiscal and tax reform should focus more on the relationship between the government and the market.
Ma Haitao stated that China's fiscal revenue has entered a low to medium growth stage while the pressure of rigid expenditures remains unabated. The contradiction between fiscal revenue and expenditure has intensified, and the risks associated with local government debt have become more prominent. Fiscal operations will remain in a "tight balance" state for some time.
For fiscal reform, he suggested it is necessary to reasonably define the scale of government, avoid unreasonable expansion of government spending responsibilities, and clarify the areas and directions of government expenditure.
Regarding the consumption tax issue, Ma said the disparity in regional consumption capacity would lead to an imbalance in the consumption tax burden. The next step should be to continue improving the consumption tax system, strengthen the role of regulation and guidance, steadily expand the scope of collection, and gradually shift the collection process to later stages in batches.
Ma believes that the next step of reform should focus more on key areas such as science and technology, education, and people's livelihood. The first is to support the strategy of building a strong nation through science and technology, the second is to support the strategy of strengthening the country through education, and the third is to support areas of social security such as healthcare and elderly care.