China Decentralization Finance Issues

Abstract

The current system of fiscal decentralization in China has a number of serious problems. Whereas it has clearly assigned revenues between the central government and provincial governments, the current system does not provide clear expenditure assignments for almost all levels of governments. In practice, the widely unfunded responsibilities have been taken up by local governments, in particular, by the governments at and under county level. Since 1994, the responsibilities for these local governments have continued to expand. On the other hand, the “tax sharing reform” of 1994 led to a very limited tax bases for local governments. In fact, a significant amount of local governments in China face serious fiscal crisis. First, the vertical and horizontal fiscal gaps are significant in China. The revenue assignments are highly centralized, however the expenditures are highly decentralized. In 2003, major taxes and 54.6% of total tax revenues belonged to the central government, but local government expenditures accounted for 69.9% of total government expenditures. Furthermore, total provincial own revenues only financed 57% of provincial expenditure.