Organizer and Chair: Susan Whiting, University of Washington
Discussant: Dali Yang, University of Chicago
The shift from a planned to a market economy poses some fundamental challenges for fiscal authorities in transition economies. The end of state monopoly ownership in industry and the decline of state-mandated trade relations at state-set prices—the three pillars of revenue generation in the pre-reform system—necessitate the development and institutionalization of a new fiscal regime. Since the Fourteenth Party Congress, the Chinese state has undertaken a series of major fiscal reforms. The 1994 tax and fiscal reforms were intended both to halt the decline in budgetary revenue as a share of GDP and to increase the central government’s share of total budgetary revenue by changing the way revenues were collected and divided between central and local governments. Thus, the 1994 fiscal reforms have been described as a battle between the center and the localities over whose interests would dominate the post-transition fiscal system. Other on-going reforms have sought to bring "extrabudgetary" revenues, which are concentrated in the hands of ministries and their affiliated agencies at lower levels, under budgetary supervision and control. These reforms have been described as a battle between the fiscal authorities and all other government agencies—a battle to be fought within each level of government.
This panel examines the ways in which the new fiscal system is being institutionalized and the implications of this institutionalization process for economic development, social welfare, and state capacity in China. Each paper addresses a critical aspect of the reform process. Christine Wong provides an overall assessment of the degree of effective fiscal control over budgetary, extrabudgetary, and "off-budget" revenues and the ability of the Ministry of Finance to direct the uses of these funds. Loraine West looks at the implications of fiscal reforms for achieving equity in the provision of social welfare and key social services at the local level. Susan Whiting examines the conflicts between public finance bureaus and other local government agencies over control of "off-budget" revenues and highlights obstacles to the full institutionalization of effective fiscal control. All the papers reflect findings from on-going field work at the national and sub-national levels.
Economic Reform and Erosion of the Budget in China: What is Left of the Budgeting Process at the Ministry of Finance?
Christine P. W. Wong, World Bank, Beijing
Past papers have described the fragmentation of government financial resources under budgetary, extrabudgetary, self raised, and other off budgetary resources. In 1996, budgetary resources accounted for 11.4% of GDP, while an audit conducted by MOF, SPC, the State General Audit Agency, PBC and the Ministry of Supervision found extrabudgetary revenues totaling nearly 6% of GDP, or more than 50% of budgetary resources. In addition to EBF, there were also "self raised funds" managed by local governments and administrative agencies. It is not clear to what extent the 1996 audit was able to capture such revenues, some large items of which come from revenues from the sale of state assets such as land leases and public housing. This paper seeks to estimate the size of total resources managed by government and to examine their impact upon the budgetary decision-making process.
Fiscal Autonomy and Local Initiatives: Unequal Capacity Across Levels of Government in China
Loraine West, U.S. Bureau of the Census
This paper addresses the fiscal autonomy of local governments in China and their capacity to fund local initiatives after the 1994 tax reform. First, the paper examines the budgetary revenue position of different levels of government after tax and revenue sharing and assesses the ability of local governments to raise non-budgetary resources through service fees and charges, asset sales, and self-raised funds. Unequal fiscal capacity is found to exist with urban levels of government (city and district) and governments in rapidly developing coastal areas in a stronger position than rural governments (counties and townships) and governments in inland areas to respond to the local needs and wishes of residents. The paper then turns to an assessment of expenditure levels. Expenditure levels are found to reflect the inequality in fiscal capacity. In general, cities are better able to respond to local needs for expanded and new services, such as the introduction of the Minimum Living Standards program in the mid-1990s in response to rising poverty associated with the restructuring of state-owned enterprises. In contrast, local governments in rural areas, especially outside the coastal region, are struggling to provide basic services that were mandated over a decade ago, such as nine years of compulsory education. The failure of fiscal reform to address the assignment of expenditure responsibility for social services contributes to this inequality. While the central government has begun to introduce a system of central government transfers to poor regions, the amount of funds redistributed through this program, thus far, are very small and are inadequate to equitably fund mandated programs and services, let alone to finance new programs and services.
All in the Family: Intra-Governmental Conflicts Over Off-Budget Revenues
Susan Whiting, University of Washington
This paper examines conflicts between local public finance bureaus, on the one hand, and other local government agencies, on the other, regarding control over "off-budget" revenues. As of 1997, these "off-budget" revenues, broadly defined, include funds generated through fees, levies, asset sales and other sources that accrue directly to various local government agencies rather than to local public finance bureaus. Beginning in the mid-1980s, the central government actively encouraged local government agencies to generate such resources by levying fees and by other means in order to supplement limited budgetary outlays which were capable of financing only a small portion of the total costs of government salaries and operational expenditures. Many local government agencies became successful "free lancers," levying new fees and developing new revenue-generated activities. These agencies enjoyed significant autonomy in the use of revenues generated in this fashion. Recent policy measures promulgated by the State Council have sought to bring such revenues under the control of local public finance authorities, since the failure to exercise control over the generation and use of such funds seriously weakens the implementation of budgetary priorities. However, local government agencies have used a variety of means to resist these policy initiatives. The paper employs a property rights framework to analyze and explain this conflict.