China's budget law revision a step in the right direction, albeit a small one

Hu Shuli backs the measures to enhance lawmakers' oversight and allow local governments to issue debt, but says more can be done

PUBLISHED : Wednesday, 30 April, 2014, 6:22pm
UPDATED : Thursday, 01 May, 2014, 2:30am

Draft amendments to the budget law were finally submitted this month to the 12th National People's Congress Standing Committee for a third reading, 22 months after their second reading.

The revision this time has a good number of laudable proposals, particularly the two related goals to enhance budget oversight by the people's congresses, and to allow local governments to issue bonds for revenue. Nevertheless, the draft law remains hobbled by China's restrictive administrative system and conflicts of interest.

Among the 100 or more measures proposed in the reform blueprint, tax and financial reform made up the biggest number

Getting this far has not been easy, to be sure. The current law took effect in 1995, and quickly became obsolete with the market reforms enacted since. Efforts to amend the law in fact began a decade ago. Sadly, the draft submitted for the second reading not only carried few improvements but actually regressed in some areas.

It was roundly criticised by academics and the public, and not a few of the provisions were hotly debated within government circles. In the subsequent public consultation exercise, the government received a whopping 330,000 suggestions from 19,000 people.

So contentious were the provisions that a third reading was repeatedly postponed. Then came the third plenum's reform road map, which finally pushed things along.

Among the 100 or more measures proposed in the reform blueprint, tax and financial reform made up the biggest number. The task of realising the leadership's pledge to regulate the budget system and make it more transparent has now fallen on the drafters of the budget law.

For effective regulation, all government revenue and spending must come under one budget. The draft law requires all items to be accounted for, to be categorised under public spending, the government project fund, operation fund for state-owned enterprises, or the social security fund.

For years, lawmakers could only scrutinise the budget for public spending. So the new measure will give greater oversight of the entire budget, and end the problem of fractured management.

This goes to the heart of the proposed changes: allowing lawmakers to perform their duty of supervision. The bill will not only let them get involved earlier, but also require officials to report their budget plans to the relevant legislature.

There's one disappointing shortcoming, however. In the past, lawmakers have often grumbled that they had no time to read and properly understand the budget proposals put before them. The draft revision addresses this to some extent, yet still does not allow lawmakers the power to veto specific provisions. Legislators must approve or reject the budget as a whole. This means there is little room for lawmakers to try to improve it.

Besides, lawmakers who are only given a hammer are likely to shy away from using it. The proposed amendment aims to restrict government power by caging it, yet appears to give the key to officials.

The bill's proposal to allow local governments to issue debt is also noteworthy. China's massive local government debt is widely seen as a fiscal time bomb. The current budget law bars local governments from issuing bonds to raise funds unless it is approved by other laws or the State Council. In the previous two drafts of the amendments, a provision requiring risk assessment of local government debt was included but then dropped.

This time, the bill proposes to allow the governments of provinces, autonomous regions and municipalities to issue bonds, subject to State Council approval. The funds raised must be used for investments that advance growth, particularly in infrastructure, but not to cover the government's running costs.

Further, the scale of the debt must be reported to the NPC for approval. The State Council will set a limit on how much money officials may raise. Based on this amount, officials will submit their budget to the relevant regional people's congress for approval. Local governments may not raise money in other ways or be the guarantor for other debt. Any official found flouting these rules will have to answer to the law.

This proposed framework is an improvement, to be sure, but only a small one. No doubt, the changes will make it easier for the central government to crack down on illegal government debt. However, in the end, only a functioning market can impose true financial discipline.

Given China's political realities, we worry that the additional government approvals required under the new law will in fact lead to the central government endorsing more local government debt, especially when the bill does not require local governments to reveal their assets and creditworthiness. The financial market has no way of judging risks.

The reforms specified in this bill are closely tied to the other economic and political reforms outlined in the third plenum blueprint. Public expectations are high that this "marathon bill" will soon be approved, and that it will be effective.

This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine.