Plus ça Change

In China’s decentralised fiscal system, since virtually all vital public services (education, healthcare, social welfare) are provided by local governments, a well-functioning intergovernmental fiscal system (IFS) is essential to ensure local governments have adequate incentives and resources to perform their role. Since 1978, China has overhauled its public finances to create a system able to finance government operations, support economic growth and supply revenues for the government’s ambitious industrial policies and international initiatives. The Achilles heel remains an IFS that is unable to fund local governments effectively and equitably.

This paper provides an analysis of the IFS through three decades of reform including those implemented since 2013, when a comprehensive package was announced, with promise of a realignment of central-local revenues and expenditures by 2020. The findings are that local fiscal status has deteriorated since 2015 due to a combination of slowing growth, tax cuts and reform pressures. This has already led to a decline in social spending as a share of GDP, threatening to reverse some recent gains in improving public services and undermine other national policy goals.