Rebalancing the Economy and Reforming the Fiscal System of the People’s Republic of China

Abstract

Following the 19th National Congress of the Communist Party of China in October 2017, the 13th National People’s Congress (the national legislature of the People’s Republic of China [PRC]) and Chinese People’s Political Consultative Conference were held in March 2018. The National People’s Congress amended the Constitution, endorsed a government reorganization, laid out an economic and social program meant to move toward achieving the goals of high-quality and cleaner economic growth, and adopted a focus on human well-being and reduced disparities within the PRC. The State Council’s “Report on the Work of Government” provided considerably more detail on the goals and objectives of the program but stopped short of identifying most of the specific policy interventions that are to come. The fact that about 85% of all government expenditures in the PRC pass through provincial and local government budgets makes it clear that reforms in the intergovernmental fiscal structure will play a role in this program. The goal in this note is to lay out and discuss a package of reforms that could be consistent with the objectives of the government. The fiscal instruments that we consider here include the division of expenditure responsibilities, subnational government taxation, intergovernmental transfers, user charges, borrowing powers, and financial management practices.