China’s Fiscal Transfer Payment System
Fiscal transfer payments (FTPs) are used as an essential element of fiscal federalism in many countries, such as Canada and the United States. They allow the central government to redistribute funds to sub-national governments. In China, fiscal transfer payments have become an increasingly important source of funding for the sub-national governments. The reasons for this are the growing fiscal imbalances between the central government and local governments and the increasing demand for public services from local governments.
This paper examines Chinas fiscal transfer payment system, with an emphasis on its development and characteristics, as well as its implications for fiscal decentralization and regional economic development. It begins by providing a general overview of Chinas fiscal system and the structure of fiscal transfer payments. This is followed by a review of recent developments in Chinas fiscal transfer payment system. Finally, this paper evaluates the implications of Chinas fiscal transfer system for fiscal decentralization and regional economic development.
The Chinese fiscal system is primarily centralized. The central government plays a major role in formulating and managing fiscal policies, and the majority of fiscal funds are allocated from the central government to lower-level governments. The central government collects nearly all taxes, including income taxes, value-added taxes (VAT), corporate taxes, and others. A portion of the taxes are then allocated to local governments through clearance distribution, borrowing for unclear distribution, and fiscal transfer payments. FTPs are a major component of the fiscal resources allocated to sub-national governments and are an important source of revenue for them.
FTPs are classified into two categories: mandatory and discretionary. Mandatory FTPs are based on a formula that allocates a certain share of the central governments fiscal resources to local governments based on the pre-set criteria such as population, economic development level, and fiscal capacity. Discretionary FTPs are discretionary funds that the central government can allocate to local governments to promote the development of economic, fiscal, and public services.
Chinas fiscal transfer system was established in the 1980s with the introduction of the Fiscal Contract System (FCS). Under the FCS, the central government and sub-national governments entered into contracts to stipulate the terms of fiscal transfer payments. This system remained in place until the 1990s, when reforms were introduced to improve the system. These reforms included the introduction of the Revenue Sharing System (RSS), the Modal Income Distribution Scheme (MIDS), and the Tax Grant-on-Grant System (TGS).
The RSS is the most important part of Chinas fiscal transfer system. It is based on a formula that allocates a certain share of the central governments revenue to local governments. This formula takes into consideration the localities’ population, economic development level, fiscal capacity, and other factors. The MIDS is a revenue-sharing scheme that distributes revenue from certain taxes between the central and local governments. The TGS is a revenue-sharing system that divides the revenue from certain taxes between the sub-national governments and the central government.
The fiscal transfer payment system in China has played an important role in promoting fiscal decentralization and regional economic development. It has allowed the central government to transfer funds to local governments to promote infrastructure development, public services, and economic growth. It has also enabled local governments to respond more effectively to the needs of their constituents by increasing their fiscal autonomy. Additionally, it has improved the equity and efficiency of fiscal policies by reducing fiscal disparities between the central and local governments.
Overall, the fiscal transfer payment system in China has been an integral part of fiscal federalism and has played an important role in promoting fiscal decentralization and regional economic development. By allocating funds to local governments based on predetermined criteria, it has allowed the central government to promote investment in infrastructure, public services, and economic growth. Furthermore, it has enabled local governments to respond more effectively to the needs of their constituents by increasing their fiscal autonomy. In conclusion, Chinas fiscal transfer system has the potential to contribute significantly to fiscal decentralization and regional economic development.
