China's fiscal reform will revolutionise government budget

Hu Shuli says the leadership's pledge to focus on the system's structure, and not just the dollars and cents of management, is a first in 30 years

PUBLISHED : Wednesday, 27 November, 2013, 7:11pm
UPDATED : Thursday, 28 November, 2013, 1:35am

A closer reading of China's recently unveiled reform blueprint signals a praiseworthy shift in fiscal and tax reform. For the first time in over 30 years of such reforms, the government says it plans to focus not just on the dollars and cents of fiscal management, but also on the structure of its administration. By doing this, the government really is "comprehensively deepening reform".

The fiscal system is the focus of one section of the blueprint, and is discussed in six other chapters. Taken together, they underline the government's belief that a modern fiscal system is a pillar of governance, and its intent to build it.

[The focus] underlines the belief that a modern fiscal system is a pillar of governance

A little historical perspective is what is needed for coming up with workable ideas for old problems

Improving the budget system is an important first step towards modern fiscal management. To this end, Chinese leaders have pledged to build a "standardised, open and transparent" budget system.

The Chinese government today collects up to 20 trillion yuan (HK$25.45 trillion) in revenue each year - about 40 per cent of the country's gross domestic product. How should it spend this money? The current practice has been to set aside about half for public finances and the fiscal budget, and distribute the rest to different departments for use. Former finance minister Xiang Huaicheng once joked that China had at least seven finance ministries.

Standardising fiscal management so that government revenue and spending come under one budget is the basis of modern management. At the same time, opening up the books for scrutiny by the National People's Congress will improve transparency and provide needed checks and balances.

First, what does standardising fiscal management mean?

As the blueprint makes clear, the government will no longer expect the amount of tax revenues collected to be linked to economic targets, as they are currently. It will also set up a standard debt-management system for central and local governments, as well as a risk-alert system, to reduce the use of special transfer payments. Realising any one of these goals will involve major changes in fiscal management.

Further, it increases the central government's administrative authority and spending responsibilities, and clearly spells out the areas of concern for the central government (defence, diplomacy and national security, for example) and local governments, as well as areas where both bear responsibility.

Second, the key to improving transparency lies in giving the legislature teeth - that is, real powers of approval and supervision. Given that fiscal revenue now totals nearly 20 trillion yuan a year, this cannot wait. As the blueprint document puts it, "the people's congresses should provide more supervision of the government's financial budget and state-owned assets".

At the same time, the government focus will shift from balancing the budget to a policy-oriented budget that can cross calendar years.

China's legislatures have often been mocked for being little more than a rubber stamp for party decisions. In the past, delegates' scrutiny of the budget has been limited to the overall amount. Now they should have the opportunity to comb through each area of spending, and even question the policy directions behind decisions.

Indeed, how should the money be spent? In the section on rural-urban development, the blueprint advocates a more balanced allocation of public resources between urban and rural areas. This includes providing basic public services for all residents, including migrants, giving them access to affordable housing and social security. In the section on improving social services, the government also pledges to set up a fairer and more sustainable welfare system. These are welcome measures that will require a substantial rise in government spending.

Where should the money come from? Normally this means a rise in taxes, but the blueprint has signalled that the government intends to keep the tax burden unchanged.

Further, the government currently levies some 18 taxes, 15 of which have yet to be made law. The blueprint has called for a review of the legal basis for the collection of taxes, and also for the property tax to be passed by the legislature and reformed.

Given the constraints on raising taxes, to ensure sufficient revenue for its spending needs, the government should rightly raise the contribution from state-owned enterprises. As it makes clear in the blueprint, state-owned enterprises will be required to contribute more towards public services, so as to protect and improve people's livelihoods. This is not only the right thing to do, it is also necessary to ensure a government budget sufficient for the nation's needs.

Clearly, reform will touch on different aspects of China's economy and society. Though it starts from the seemingly straightforward premise of improving the budget system, the government is attempting nothing short of a revolution.

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