Public Budgeting Reforms in China

Article excerpt

Over the past two decades, China's economic reforms have brought remarkable growth, the development of a vibrant private sector and significant reform of state-owned enterprises. In 2007, China's 20.9 trillion yuan (U.S. $2.7 trillion) economy is on track for its fourth straight year of double-digit growth. Seen from a distance, China's growth is remarkable. Seen up close, it is bewildering and somewhat scary. Many challenges remain.

Achieving an Xiaokang Society

In 2003, the Communist Party of China decided to strive for "five balances" in the country's development as part of a vision of achieving a moderately prosperous or xiaokang society by 2020. The xiaokang society refers to the stage of development during which people generally are not rich, but most have adequate food, clothing and other material belongings necessary for a decent life. It is a stage China must pass through in its drive for modernization. The next goal is to achieve overall modernization by the mid-21st century.

The five balances are between urban and rural development; development among regions; economic and social development; man and nature; and domestic development and opening up to the outside world.

China's new vision is reflected in its 11th Five-Year Plan, for 2006-2010. For the first time the plan explicitly focuses on targeting "outcomes" of economic growth rather than simply the "rates" of growth. This means more attention to government performance. It also is important to note that the Chinese now call the 11th Five-Year Plan a "strategic plan" (guihuá) rather than a "command economy" type of plan (jihuá). The content has changed as well, reflecting a transition from a centrally planned economy to a socialist market economy as well as a broadening of scope to emphasize the social and economic dimensions of development.

Unequal Fiscal Expenditures

In 26 years of reform and opening-up, China has witnessed a great increase in fiscal expenditures for both developed and undeveloped regions. Unequal economic development of Chinese regions has resulted in unequal fiscal revenues among local governments. In the past 10 years, the gap in fiscal expenditures has widened further. The distinct difference in fiscal expenditure among regions indicates that China lacks a powerful inter-regional transfer payment system. In the past 10 years, the differences among provinces in fiscal expenditure did not decrease significantly, even though the government reinforced its fiscal support to the western regions. The difference in fiscal expenditure among different provinces inevitably results in varying scale and quality of public services.

Since 1994, the central government has used a "revenue sharing" scheme to help support the less developed central and western areas. But the country has not reached the goal of balancing public finance among regions. An important reason for the failure is that refunds of locally collected taxes from the central government are linked to the growth rate of local value-added taxes or consumption taxes. As a result, the richer the area, the higher the taxation growth rate and the more tax rebated. To some degree, this has widened the gap between developed and less developed areas.

Reform of the Public Budget System

China has undertaken a number of important improvements in the budget system in recent years and more are on the drawing board, including a more modern budget classification system, which will be introduced in 2007. Some of the major reforms include implementation of unified departmental budgets; a centralized treasury receipt and payment system; centralized government procurement including public bidding (which reportedly saved hundreds of billions of dollars); mandatory separation of revenue from expenditure (to send receipts to the Treasury); reform of the classification of government revenue and expenditure; and implementation of the Government Financial Management Information System. …