DOC

Soft-Budget Constraint on Local Governments in China

By June Freeman,2014-12-13 11:22
8 views 0
Soft-Budget Constraint on Local Governments in China

    Chapter 5:

    Soft-Budget Constraint on Local Governments in China

    Jing Jin and Heng-fu Zou

    I. Introduction

    A significant feature of China‘s economic reform since 1978 is the devolution of the central government‘s control over the economy to subnational governments. The fiscal system is

    decentralized among five levels of government: national, provincial, municipal, county, and township governments, which are broadly categorized into center, provincial, and local governments (all sub-provincial governments). This paper mainly focuses on soft-budget constraints in the relationship between the central government and the provinces. The term ―local‖ and ―subnational‖ refers to the provincial level or aggregated subnational governments,

    unless otherwise specified.

    China‘s subsidy, taxation, credit and administrative pricing systems are all subject to soft budget constraints. Prior to 1994 under the Chinese fiscal regime, the collection of all taxes and profits followed the pre-reform pattern: local government collections were remitted to the center and then transferred back to the provinces according to expenditure needs approved by the center. Policymakers in the central government decided what type of revenues should be collected and how these revenues were to be reallocated for national and local public good provisions. Most expenditures at subnational levels were financed by central transfers and complemented by a few self-retained local tax receipts. The prereform fiscal system resulted in a fundamental lack of incentives and efficiency, which became the major concern of the central authorities. In the 1980s, a series of reforms were implemented to revamp the fiscal relations between the central

     1

    and subnational governments. Although incentives to spur tax collection efforts by local

    1 they also reduced the share of revenues passed governments were successful to a certain extent,

    on to the central government. Before the 1994 tax system reform, the central government‘s share of total revenue declined from 44 percent in 1978 to 23 percent in 1993, while the total subnational revenue share increased from roughly 56 percent to 77 percent during same period. At the same time, the consolidated government revenue share in GDP also shrank from 47 percent in 1978 to 13 percent in 1993. Despite the fact that fiscal decentralization in the 1980s shifted more resources to local governments in terms of its increased share in total revenues, the shrinking pie also considerably reduced the budgetary resources allocated at the provincial level (Table 1).

     1 Unlike the previous system, reform in the 1980s allowed provincial authorities to retain all or a proportion of the

    tax collected after sharing with the center.

     2

Table 1

    Central and Provincial Government Revenue Shares in Total Revenue and GDP Year Tax Revenue Revenue Total Central Tax Total Subnational Share of Share of GDP Total

    ( Billion from Revenue Revenue Central Revenue Total Central Subnational (Billion Government

    Yuan) Enterprises (Billion (Billion Yuan) Revenue (Billion Revenue in Revenue in Yuan) Revenue as a

    [without SOE (Profit Yuan) (Billion Yuan) Total Total Percentage in

    remittance] Remittance, Yuan) Revenue Revenue GDP

    Billion (%) (%) (%)

    Yuan)/a

    1978 113.2 57.2 170.4 17.6 74.8 95.6 43.9 56.1 362.4 47.0 1979 114.6 49.5 164.1 23.1 72.6 91.5 44.2 55.8 403.8 40.6 1980 116 43.5 159.4 28.4 71.9 87.5 45.1 54.9 451.8 35.3 1981 117.6 35.4 153 31.1 66.5 86.5 43.5 56.5 486.2 31.5 1982 121.2 29.6 150.8 34.7 64.3 86.5 42.6 57.4 529.5 28.5 1983 136.7 24.1 160.8 49 73.1 87.7 45.5 54.5 593.5 27.1 1984 164.3 27.7 191.9 66.5 94.2 97.7 49.1 50.9 717.1 26.8 1985 200.5 4.4 204.9 77 81.4 123.5 39.7 60.3 896.4 22.9 1986 212.2 4.2 216.4 77.8 82 134.4 37.9 62.1 1020.2 21.2 1987 219.9 4.3 224.2 73.6 77.9 146.3 34.7 65.3 1196.3 18.7 1988 235.7 5.1 240.7 77.4 82.5 158.2 34.3 65.7 1492.8 16.1 1989 266.5 6.4 272.9 82.3 88.7 184.2 32.5 67.5 1690.9 16.1 1990 293.7 7.8 301.5 99.2 107 194.5 35.5 64.5 1854.8 16.3 1991 314.9 7.5 322.4 93.8 101.3 221.1 31.4 68.6 2161.8 14.9 1992 348.3 6 354.4 98 104 250.4 29.3 70.7 2663.8 13.3 1993 434.9 4.9 439.8 95.8 100.7 339.1 22.9 77.1 3463.4 12.7 1994/b 521.8 521.8 290.7 290.7 231.1 55.7 44.3 4675.9 11.2 1995 624.2 624.3 325.7 325.7 298.6 52.2 47.8 5847.8 10.7