Expenditure Assignments in China

Abstract

China has been carrying out a significant fiscal decentralization policy for over three decades. However, reforms have largely concentrated on the revenue side of budgets, and generally they have not been coordinated with an explicit strategy for the decentralization of expenditure assignments. Although significant strides have been made in the areas of tax assignments and tax administration, other areas—in particular, the assignment of government functions—have advanced much less. Yet a stable, efficient, and fair decentralized system of public finance in China will require an unambiguous and well-defined institutional framework in the assignment of expenditure responsibilities among the different levels of government. The assignment of responsibilities is by no means the only condition, but it is the most important, and it should also be the first in a well-sequenced decentralization reform effort. This chapter reviews the most important current issues surrounding the assignment of expenditure responsibilities in China. In order to put those issues in the proper perspective, an overview is provided of the general principles of expenditure assignments and the common problems encountered in the international experience. The chapter also provides a road map and practical recommendations for the reform of expenditure assignments in China.