Fragile Financial Base of the Bureaucratic Pyramid: China's Concern

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Last updated at: (Beijing Time) Monday, December 16, 2002

Fragile Financial Base of the Bureaucratic Pyramid: China's Concern

The stringent fiscal condition of China's grass-roots governments is damaging the local economy, the primary education and even the local social stability if not handled properly.

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The stringent fiscal condition of China's grass-roots governments is damaging the local economy, the primary education and even the local social stability if not handled properly.

Five reasons account for the fiscal strain suffered by the county and town governments, according to a research report by the Development Research Center (DRC) under the State Council, a governmental think tank.

First, local governments have no reliable tax sources for a steady revenue flow.

In 1994, Chinese Central Government and local governments made a clear division between them on what taxes should be collected by each and how to share the revenue if it is from a certain tax belonging to both.

After the division, the central government has scooped up most lucrative taxes, leaving to the local governments usually the low-revenue-bearing taxes costly to collect.

As a result, the ratio of local governments' revenues contributed by local taxes has been declining ever since, according to the report published in the Beijing-based China Economic Times.

Such a situation has forced local governments to turn to the so-called outside-budget income, for example administrative fees, various fines and any other forms of non-tax contrivances, to make their ends meet.

It turns out that farmers eventually will have to shoulder a considerable proportion of the assorted taxes and fees.

Given farmers' nearly stagnant income increase since 1997, not only is it very hard for local governments to collect these taxes and fees, but the practice has also aroused great dissatisfaction among farmers toward the local governments.

Bureaucratic mammoth on trickling revenues

Second, the over-bloated local bureaucracies and the armies of fiscally-supported administrative staff are draining off the local governments' meager coffers.

The Chinese Central Government has launched waves of campaign to reduce the size of local governments. But all the efforts prove basically ineffectual.

From 1994 to 2000, the fiscally-supported administrative staff of Taihe County at central China's Jiangxi Province, one of the places surveyed by the DRC research, rose from 10,276 to 13,676, up 4.9 percent per year on average.

In 1994, all the administrative staff on the local fiscal pay list made up 2.12 percent of the county's population. By 2000, the ratio climbed to 2.68 percent.

It is roughly the same with all the other counties and towns covered by the research, according to the report.

The pressure on local finances has further worsened since both the central and local governments decided to raise the public servants' salaries over the past three years.

Although the central government has in a way subsidized local authorities for the increased fiscal expenditure due to the salary raise, the local governments still stand out at elbows in their budget.

Who should take more?

Third, the central and provincial governments have siphoned away the lion's share of the local revenues.

Under the current tax arrangements, each county government has to hand 75 percent of their value-added tax and 100 percent of their consumption tax over to the central government.

Although the central finances has promised to transfer a certain sum of the revenues to the local governments, the amount is quite small relatively to that handed out by the local governments.

From 1994 to 2000, the total sum of the value-added tax and the consumption tax handed over to the central coffers by Xiangyang County of central China's Hubei Province inched up one and half times. On the other hand, however, the central government's transfer payment to the county rose just by 34.2 percent.

As a result, the net revenues submitted to the central finances by Xiangyang County chalked up by 220 percent during the period.

What's worse is that the provincial governments also slice a share out of the county finances, forcing the latter to turn to the town and village administrations for money to support their fiscal expenditures.

Undoubtedly, all the pressure finally piles on the back of the county, town and village administrations, which has made the grass-roots governments sometimes even unable to pay their servants' salaries.

The last straw might be the obscure division between the central and local governments on their respective public responsibilities, which has shifted to the local governments quite a few public duties actually accountable to the central government.

A good case in point is the compulsory primary education in the countryside.

Theoretically, the rural compulsory primary education, as one of important national public obligations, should mainly be financed by the central and provincial government, or at least shared by both. But the reality is right on the contrary.

During the period of 1990 to 2000, to the total primary education budget of Xiangyang County, the town and village administrations contributed 34.33 percent, while the county and the provincial governments -- including the central government's transfer payment -- offered respectively only 6.25 and 0.1 percent.

Any way out?

The DRC report suggests alleviating the county and town financial crisis in the following ways.

* Re-distribute the revenues from the value-added tax and the consumption tax.

Given the different economic levels of all provinces and their necessary spending on the primary education, medical care and other public infrastructures, the central coffers should leave more revenues to local governments.

* Improve the existing transfer payment mechanism.

The tax division between the central and local governments has strengthened the former's financial capacity, but which should not mean to sacrifice the compulsory primary education and the basic medical care in the countryside.

The current transfer payment system between the central and local governments should be upgraded to ensure the latter capable of delivering their two most fundamental public services.

* Streamline the local bureaucracies and decrease the number of fiscally-supported personnel

* Clarify the financial responsibilities between the provincial governments and the county and village administrations.

Of the total administrative staff on the local governments' pay list, 70 percent stay at the county and village administrations.

In terms of the financial capacity, however, the county and village administrations' revenue consists only of 40 percent of local governments' total.

On the other hand, provincial governments' revenues increased from 16.8 percent to 28.8 percent of all local governments' total during the period of 1994 to 2000.

The provincial governments are obviously collecting more money and therefore should also transfer more to the county and village administrations to strengthen their public service capacity.

* Reform the current budget management system and strengthen supervision over local governments' fiscal spending

The first step should be to combine the outside-budget capital into local governments' normal budget schedule.

The local governments' outside-budget balance has actually cut an opening for the public staff to rake money into their own departmental purse with whatever excuses, which is easy to cultivate corruption.

As a matter of fact, one of the purposes of the on-going reform to reduce farmers' tax burden is aiming right at checking local governments' wanton imposition of various taxes and fees upon farmers.

* Develop the local economy and create more tax resources

In addition to the faulty taxation arrangement between the central, provincial and county and town governments, the underdeveloped local economy is one major reason for most county and town administrations' weak financial power.

While planning the proactive financial policies, the central government should heed how to prosper the economies of counties, towns and villages, especially those in central and western China, the report said.

By PD Online Staff Forest Lee

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