Central govt taking on greater financial burden

Cheap credit has been a major tool for the Chinese government to fuel growth, but it has become less effective and more risky over the years.

Now the top decision-makers are trying to solve the problem on a deeper level by reshaping the country's fiscal system, or the government's own pocket, in pursuit of not only sustainable growth but modernized governance as well.

The central government should take a larger share of the fiscal pie as well as greater responsibility for expenditures, so as to ease the burden on local governments and give the market more say, experts have said.

Optimizing the fiscal relationship between the central and local governments was among the three major tasks for building a fiscal system by 2020, which was a goal set by the country's top leaders in late June.

"This means to establish a fiscal system in which the government's expenditures match the revenue," Finance Minister Lou Jiwei explained.

In the first five months, the central government's revenue totaled 2.89 trillion yuan ($466 billion), while that of local governments was 3.23 trillion yuan. At the same time, it spent only 879.5 billion yuan, while local governments were responsible for 4.38 trillion yuan of the expenditure.

"Globally, fiscal revenue of central governments normally accounts for more than 70 percent of the total government revenue; in the United States, the level is around 65 percent," Lou said.

But in China, the central government's revenue normally accounts for less than 50 percent of the total, and it is responsible for only about 20 percent of public expenditures.

The finance minister said that the structure will be optimized, with the central government taking in more taxes as well as more spending duties to improve the social security system, while giving some revenue back to local governments to fill in the expenditure gap.

"This will be a fundamental change for China's fiscal system," said Tang Yunyi, a researcher with the Institute of Economics at the Shanghai Academy of Social Sciences.

"To reshape the fiscal relationship between central and local governments is also to redefine the boundaries of the administrative power in the market. The function of China's fiscal system should change from government finance to public finance," she said.

The first task for the government is to establish a social security system, while economic regulation is only the secondary task, Tang said.

"In the past, the fact that expenditures of local governments were much larger than those of the central government is evidence that the government had taken the market's job," she said, explaining that social security expenditure should be carried out by the central government, because it ought to benefit the entire country equally.

For example, she said, although the resource tax on coal is mostly collected from Shanxi province, it should be used to benefit people nationwide.

In the meantime, Tang said, less expenditure also will ease local governments' debt burdens, which have become a major challenge to world's second-largest economy as more local government loans are set to mature in the next two to three years.

According to the latest official data, China's local government debt amounted to 17.9 trillion yuan by the end of June 2013.

"These borrowings are the result of too many expenditures shouldered by local governments," Tang said.

But she also pointed out that the evaluation system for local officials should be modified.

Sun Lijian, director of the Financial Research Center at Fudan University, said if GDP growth is still the assessment criterion, local officials might raise more funds using the "shadow banking" system, which incurs fewer taxes.

The pursuit of larger fiscal power by local authorities has already resulted in a rise in arbitrary fines and confiscations.

In 2013, China's non-tax government revenue grew by 12.1 percent, two percentage points faster than the growth of regular government revenue.

Jia Kang, director of the Institute for Fiscal Science Research under the Ministry of Finance, said one way of solving the problem could be to let local authorities decide the rate of some local tax items.

For example, the rate of property tax could vary in accordance with the development of the property market in each region, he said.