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    Financing Services for Children in


    Volume 2:

    The Budget System

    and Fiscal Transfers

    By Mei Hong

    Public finance consultant

     nd3 draft, 22 October 2006

UNICEF China Country


National Working

    Committee on Children and


    人类发展论坛2006健康与发展国际研讨会背景报告 Abbreviations and acronyms

BOF Bureau of Finance

    CNCC China National Children‘s Centre

    CPC Communist Party of China

    CRC Convention on the Rights of the Child

    DRC Development Research Centre under the State Council GDP Gross domestic product

    GOA Government Office of Administration of the State Council IMF International Monetary Fund

    LGOP Leading Group Office of Poverty Alleviation and Development LGWRD Leading Group for Western Region Development MCH Maternal and child health

    MDGs Millennium Development Goals

    MLSS Ministry of Labour and Social Security

    MOCA Ministry of Civil Affairs

    MOE Ministry of Education

    MOF Ministry of Finance

    MOH Ministry of Health

    MOPS Ministry of Public Security

    MOST Ministry of Science and Technology

    MTEF Medium Term Expenditure Framework

    NBS National Bureau of Statistics

    NDRC National Development and Reform Commission NPA National Programme of Action for Child Development NPC National People‘s Congress

    NWCCW National Working Committee for Children and Women under the State Council

    R&D Research and development

    RCMS Rural Cooperative Medical System

    SCOPSR State Commission Office for Public Sector Reform SOEs State owned enterprises

    UK United Kingdom

    UN United Nations

    UNICEF United Nations Children‘s Fund

    WHO World Health Organization



Executive Summary

    The Chinese Government is firmly committed to achieving the Millennium Development Goals (MDGs) and the goals for children set out in the National Programme of Action for Child Development (NPA)

    th2001-2010 and the 11 Five Year Plan. This commitment to children is a key part of the national development vision of a xiaokang society, which is a human-centred vision and one that emphasizes the importance of social development, as well as balanced development between urban and rural areas and among and within regions.

    The Chinese government has issued numerous laws, regulations and policies to provide services for children, especially compulsory education and maternal and child health (MCH) care. One of the main challenges is to ensure that these intentions are adequately reflected in planning and budget allocations.

    thAt present, although the goals of the NPA for Child Development are reaffirmed in the 11 Five Year

    Plan, it is not clear that the NPA is properly taken into account in the process of annual planning and budget formulation. Moreover, most policies and regulations do not specify how the necessary financing is to be mobilized and shared by different levels of government.

Budget system issues

    A number of important improvements in the budget system have taken place in recent years and more are on the drawing board, including a more modern budget classification system which will be introduced in 2007. However, some important problems remain and these have major implications for the financing of services for children.

    ; Fragmentation of the budget process. Off-budget revenue and expenditure flows remain

    significant, particularly at the local level. Budgeting is therefore not yet fully unified, which

    compromises budget transparency and the rationality of allocation decisions. The budget process

    is further fragmented by the fact that different government agencies review and consolidate line

    ministries‘ budget proposals for recurrent and capital expenditure. This may be one of the reasons

    why there are sub-optimal input mixes, including in the social sectors, with schools for example

    under-funded for non-personnel operating expenditure.

    ; Weaknesses in budget methodology. The new budget classification system will introduce modern

    economic, organizational and functional classifications that will make it easier than in the past to

    analyse the effectiveness and efficiency of expenditure and thus to make better budget decisions.

    However, this may be insufficient for fully-fledged performance evaluation of expenditure,

    including on services for children, as there is not yet a programme-based budget methodology,



    nor a fully developed indicator framework and adequately detailed and disaggregated data. Furthermore, there is still a tendency for budgeting, especially at the lower levels where most of the public financing of services for children takes place, to be conducted in an incremental manner. This makes it difficult to adjust spending by a big margin to reflect the new priorities resulting from the greater emphasis on social development in the xiaokang vision. The scope for

    such adjustments is also limited by the lack of a rolling multi-year fiscal framework for budget planning. These weaknesses have hindered achievement of the official targets of a 4% ratio of government education expenditure to GDP and a 10% share of MCH services in government health expenditure, as well as better planning of new funding commitments (for universal compulsory education and the expansion of the Rural Cooperative Medical System) to avoid adding to the fiscal burden on sub-national governments.

    ; Weak equalizing effects of inter-governmental fiscal transfers. The 1994 fiscal reform

    recentralized government revenues but did not reassign expenditure responsibilities among central and sub-national governments, leading to a major vertical imbalance in central and sub-national budgets. Lower level governments, especially county governments, account for the bulk of expenditure on compulsory education, MCH care and other services for children. At the same time, the large differences in levels of economic development across the country mean that there are horizontal imbalances in revenue capacity. The government has tried to overcome these imbalances through fiscal transfers, but the equalization effects in the social sectors have been limited by the predominance of tax rebates ( which is regarded by the theory circle as major part of general transfers and internal fiscal revenue sharing among different level of governments by the fiscal operational circle), which reinforce rather than reduce horizontal revenue disparities, and by the incentives to use equalization subsidies to cover administrative costs, including staff salaries, and to prioritize economic development and job creation over social development. Earmarked transfers have been used to promote universal compulsory education and are set to increase as the policy of waiving all fees for compulsory education is extended throughout rural China. But, overall, transfers have not been sufficient to overcome the large geographical disparities in expenditure per pupil. Earmarked transfers have played a smaller role in the health sector and, although these will increase to support the expansion of the RCMS, there are huge disparities in expenditure on MCH services between urban and rural areas. An important gap in the current transfer arrangements is the lack of transfers to support migrant children‘s access to services, despite the fact that these children are among the most disadvantaged, facing inequalities in access to compulsory education and no opportunities to access health insurance.

    Preliminary recommendations

    This study was based on a review of existing literature and publicly available data. The proposals set out



    here should therefore be seen as preliminary suggestions. They are quite broad in nature and will need to be developed further following in-depth research, especially at county level.

    ; Strengthen the linkages between policies, regulations, plans and budgets. In order to reflect fully

    ththe government‘s commitments to children, as set out in the NPA and incorporated into the 11 Five

    Year Plan, more attention should be given to ensuring that these specific commitments are reflected

    in the annual development plans and annual budgets.

    ; Unify the budget process. To achieve transparent rational budgeting, it is necessary to bring all

    remaining off-budget revenue and expenditure into a single unified budget framework. At the same

    time, it is important to integrate the budgeting for recurrent and capital expenditure, so that these are

    mutually consistent.

    ; Adopt a multi-year fiscal framework to facilitate budget planning. A rolling multi-year fiscal

    framework would facilitate medium/long term budget planning. The fact that some key public

    expenditure targets (e.g. the ratio of education expenditure to GDP and the share of MCH services in

    health expenditure) have proven elusive over many years underscores the need to plan these shifts in

    expenditure over a multi-year horizon on the basis of a forecast resource envelope and policy

    priorities. This would also help to plan the sharing of expenditure responsibilities among the

    different levels of government so as to avoid over-burdening lower level governments. ; Strengthen performance evaluation. To enhance accountability and improve incentives for

    government agencies to use government resources efficiently and effectively to provide quality

    services for children, a performance indicator framework is needed, along with adequate data, as

    well as appropriate criteria for the evaluation of government agencies and officials. ; Consider a results-based planning and budget methodology. This would make it possible to link

    inputs to the achievement of policy objectives and outcomes, such as the reduction of child

    mortality or the achievement of universal compulsory education. It would require the development

    of programme classification codes and training officials in their use, as well as the nurturing of a

    ‗managing for results‘ culture in the civil service.

    ; Provide more detailed data on the financing of services for children. The government should

    publish more detailed, disaggregated statistical data on public expenditure on education, health and

    other services of importance for children. Key fiscal data on services for children should also be

    integrated into the NPAInfo data-base established by the National Bureau of Statistics for

    monitoring of the NPA. For planning and budgetary purposes it is also urgent to ensure the full

    inclusion of migrant children in statistics on population groups requiring services in urban areas.

    ; Further rationalize inter-governmental fiscal relations. To overcome the vertical and horizontal

    fiscal imbalances that result in major geographical disparities in expenditure per capita on essential



    services for children, it is necessary to review and define clearly the expenditure responsibilities of different levels of government, as well as the different types of inter-governmental fiscal transfers, with a view to introducing improvements that would enhance their equalizing effects. Attention should also be given to extending earmarked transfers to support access to medical insurance and compulsory education by migrant children and other poor urban children, in addition to children in the rural areas.





    China has enjoyed rapid economic growth over the past two decades and this seems set to continue in the

    thcoming years. According to the 11 Five Year Plan, GDP per capita is expected to reach RMB 19,270 (or

    $2,408) by 2010, and longer term projections point to GDP per capita rising to RMB 36,514 (or $4,564)

    ?by 2020.

    However, the government has become increasingly aware that economic growth by itself does not necessarily optimize social development. Although China has made enormous progress towards the achievement of important social goals, including universal nine years compulsory education and the reduction of maternal and child mortality, there are large disparities in the provision and quality of social services between urban and rural areas, and among and within geographical regions, and there are parts of the country, mainly in remote rural areas, that are still mired in poverty, with social indicators that are far behind the rest of the country. Within the urban areas, there are pockets of poverty, particularly among migrants, who now constitute about one tenth of the national population.

To overcome these problems, the Communist Party of China (CPC) decided in 2003 to strive for ‗five

    balances‘ in the country‘s development as part of its vision of achieving a moderately prosperous (xiaokang) society by 2020. These 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. This development vision, which aims to build a harmonious society that is based on equity and addresses the fundamental needs of all of China‘s citizens, is reflected in the th11 Five Year Plan for 2006-2010 (NDRC, 2006). It also emphasizes investment in human capital as an essential component of the national strategy for growth and development.

    This approach to development inevitably means giving high priority to children, and to overcoming the disparities in child indicators, and this is shown by the Plan‘s commitment to the full implementation of the National Programme of Action for Child Development (NPA), which was adopted by the Chinese government for the decade from 2001 to 2010 (NWCCW, 2001). As Box 1 shows, children make up one quarter of China‘s population. Along with its ratification of the Convention on the Rights of the Child

    th(CRC) in 1991 and the adoption of the NPA in the same year, the 11 Five Year Plan and numerous other

    programmes and projects as well as laws, regulations and policies demonstrate the Chinese Government‘s strong commitment to the rights of children. It is noteworthy that the goals and targets in

    the NPA are also broadly consistent with the Millennium Development Goals (MDGs), in particular regarding the achievement of universal primary education, the reduction of child mortality and the elimination of gender inequality.

     ? Figures based on revised national accounts following the national economic census in 2004, and on an exchange rate of RMB 8 to the US dollar.



    Box 1 Children in China’s population

    In this study, children are all human beings under the age of 18, in accordance with the definition in the UN Convention on the Rights of the Child (CRC) as well as in China‘s Law on the Protection of Minors,

    which has been in force since 1992.

According to the population census in 2000, the total child population was 345 million, accounting for

    27.8% of the total population. The 2005 China Population Statistics Yearbook reports that in 2004 the total

    child population declined to 326 million, which was 19 million less than in 2000, and accounted for 25.1%

    of the total population. The sex ratio was 53.4% male to 46.6% female.

    Since the 1980s, internal migration has developed on a large scale in China. The 2000 census figures gave a total migrant population of 131 million, accounting for 10.6% of the population. This included 23.6

    million children, who made up 18% of the total migrant population. At present, the migrant population is thestimated to number some 140 million. The 11 Five Year Plan sets out a series of measures to facilitate

    migration from the rural to urban areas, and projects that the urbanization rate will rise from 43% in 2005 to 47% in 2010.

Table I.1 Population data, 2000

    % share Number of total of child of migrant of migrant (million) population population population children

    Total population 1,242.6 100.0

    Child population 345.3 27.8 100.0

    Male 182.6 14.7 52. 9

    Female 162.7 13.1 47.1

    Migrant population 131.2 10.6 100.0

    Migrant children 23.6 1.9 6.8 18.0 100.0

     Male 11.81 0.9 3.4 9.0 49.98

    Female 11.82 0.9 3.4 9.0 50.02

    Source: Tabulation on the 2000 Population Census of the People’s Republic of China, Population Census

    Office under the State Council, Department of Population, Social, Science and Technology Statistics, National Bureau of Statistics, China Statistics Press, August 2002.

    One of the most important challenges facing the Chinese government is to find the most effective ways to

    thoperationalize the development vision encapsulated in the xiaokang concept and set out in the 11 Five

    Year Plan, including with respect to services for children. Budget policy is crucial in this regard, especially since public expenditure on social development is relatively low in China, relative to the size of China‘s economy and the total resources available for public expenditure, and is unevenly distributed between urban and rural areas and among regions, provinces and counties. To address these and other challenges requires the involvement of many different line ministries that are responsible for the delivery of services for children, as well as the Ministry of Finance and other macro-level government institutions, notably the National Development and Reform Commission because of its role in planning as well as capital expenditure, and the Office of the National Working Committee for Children and Women (NWCCW) under the State Council , which has a broad coordinating responsibility within government on issues concerning children.



    The NWCCW-UNICEF studies on financing of services for children

    To help address these issues, NWCCW decided to initiate a project on the financing of services for children, with the support of the UNICEF China Country Office. This began in March 2006 with two desk studies, aimed at identifying key issues for subsequent in-depth research. The first desk study was a review of expenditure in the education and health sectors, focusing in particular on compulsory education and maternal and child healthcare. The present study, which is the second of the two, focuses on institutional and technical issues in the budget system that indirectly affect allocations, including the allocations for services for children.

    This study was based on a review of existing literature and publicly available data, supplemented by information provided by concerned government ministries. It should be noted that the report makes use of the adjusted national accounts data resulting from the national economic census conducted in 2004. Thus, all GDP ratios in the report are based on the revised GDP data.

    The first draft of this report was circulated widely within government for comments and suggestions for improvements in the data and analysis. Detailed comments were received from the Ministry of Finance, the National Development and Reform Commission, the Ministry of Health, the Development Research Centre of the State Council, and the Institute of Fiscal Science, in addition to NWCCW and UNICEF. The author is grateful for the extensive and extremely valuable comments made by these institutions, which contributed to substantial improvements in the second draft of the report.

    The author remains responsible, however, for the content of this report and for its final conclusions and recommendations, which do not represent the official position of NWCCW, other Government institutions or UNICEF.

Structure of the report

    Following this brief introduction, the report has four chapters. Chapter 1 describes the planning and budget system, including the procedures for preparing, approving and executing budgets at the national and sub-national levels. Chapter 2 assesses methodological aspects of the budget system, including in particular budget classification. Chapter 3 focuses on the relations between the budgets of the different administrative levels of government in China (central, provincial, county/district and township), including the transfer payments made from higher to lower administrative levels. Each chapter provides examples relating to the education and health sectors. Chapter 4 concludes the report with a series of preliminary recommendations.



    1 The Planning and Budget System

    ?This chapter describes how the Chinese planning and budget system works. First, it introduces the

    main types of plans, as well as the annual budget, discusses the nature of these instruments and explains their role at both the national and sub-national levels of government. Second, the chapter discusses two features that tend to fragment the budget system, making it difficult to have a unified approach to budgeting: the large, though declining, proportion of off-budget revenue and expenditure flows, particularly at sub-national level, and the organizational divide between recurrent and investment budgeting. The chapter ends with a more detailed description of the main stages of the planning and budget cycle: formulation, approval, execution and reporting, auditing and evaluation.

1.1 Levels and types of plans and budgets

    Although China began to adopt five year development plans from 1953, it has not enacted a planning law as such to guide the planning process. However, the Constitution has quite detailed provisions regarding the planning process and, in 2005, the State Council issued a document, Opinions of the State Council on

    Enhancing the Formulation Work of the National Economic and Social Development Plan, which made

    proposals on long-term development planning, providing for three types of long-term plans (overall, special and regional) and three levels of long-term planning (central, provincial and county), as shown in Figure B-1. Long-term plans normally cover a period of five years or more. The key overall development plan is the National Five Year Economic and Social Development Plan. Examples of special plans include the National Programme of Action for Child Development 2001-2010 and the National Programme of Action for Women‘s Development 2001-2010 (see Box B-1). There are also short term

    (one year) development plans, which exist at four levels: national , provincial, prefecture and county.

    Figure B-1 Levels and types of long-term development plans

    Overall planSpecial plansRegional plansNational level

    Overall plansSpecial plansProvincial level

    Overall plansSpecial plansCounty level

     Source: Opinions of the State Council on Enhancing the Formulation Work of the National Economic and Social Development Plan, 2005.

    thIt may be noted in passing that the planning terminology has recently changed, with the 11 Five Year

    Plan being termed a ‗strategic plan‘ (guīhuà) rather than a ‗command economy‘ type of plan (jìhuà). The

    content has undergone a substantial change as well, which reflects the transition from a centrally planned

     ? The system and processes described in this and later chapters refer only to mainland China, excluding Hong Kong, Macao and Taiwan.


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