1. Part VI China’s Budget system and Fiscal policy

2. Recall the lecture about China public finance system
What are the major characteristics of China’s public finance system?
Revenue and expenditure structure?
Public sector assets?
Matching of revenue and expenditure at central and local level?
Debt management?
Budget management?

3. China’s Budget System and Fiscal Policy
China’s intergovernmental fiscal relationship
China’s fiscal policy: targets and measures
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

4. Dr.DU Li, Department of Public Economics, Fudan University
China’s Budget System
Four parallel budgets
China’s budget system reform
12:32:13
Dr.DU Li, Department of Public Economics, Fudan University

5. Dr.DU Li,Depertment of Pulbic Economics,Fudan University
Four Parallel Budgets
China has four parallel budgets:
General budget
Government fund budget
State capital budget
Social security fund budget
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

6. China’s Total Governmental Revenue
　          Items      
2011
2012
2013
2014
billions of RMB
% of GDP
General budget (Public finance budget) 22
22.6
22.7
22.1
Government fund budget
8.8
7.2
9.2
8.50
State capital budget
76.5
0.2
97.068
105.84
157.80
Social security fund budget
2054.2
5.5
6.1
5.9
Total governmental revenue
36.5
35.5
38.2
37.0
China’s total governmental revenue consists of four parts.
The main part of general budget ( or public finance) revenue is tax revenue which can be indicated in next slide. It is the general budget revenue that provides funds for the general budget expenditure such as general public service, education, national defense, health care, etc..
The main part of governmental fund budget revenue is State-owned land-use rights transfer revenue. In principle, the governmental fund budget revenue can only be used for special purposes and can not cover the general budget expenditure in general public service, education, national defense, etc. The State-owned land-use rights transfer revenue is the most important source of fund for China’s infrastructure construction.
The State capital budget and the social security fund budget have been published only in recent years. The main source of the State capital budget revenue is the dividends distributed by the State-owned or State-invested enterprises from their after-tax profits to the state. The main source of the social security fund budget revenue is the social security contribution. Generally speaking, the State capital budget revenue and the social security fund budget revenue are not collected by the fiscal or tax departments, and the revenue cannot be used to cover the general budget expenditure as well.
Based on the information above, we can see that even if China’s tax-GDP ratio is not high compared with many other countries, the government actually controls much bigger share of GDP.
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

7. Dr.DU Li,Depertment of Pulbic Economics,Fudan University
Four Parallel Budgets
General budget
（best-developed and organized）
Major revenue: taxes, major fees and charges,…
Major expenditure(2011): education(14%), general public affairs(10%), social security and employment(10%), agricultural affairs(9%), urban and rural community affairs(7%),national defense(6%), public security(6%), transportation(6%),health care(5%), science and technology(4%), resource conservation and environmental protection(3%),housing security(3%)…
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

8. Dr.DU Li,Depertment of Pulbic Economics,Fudan University
Four Parallel Budgets
Government fund budget
Major revenue:
Proceeds from transfer of land-use rights, other government fund revenue
Major expenditure:
Expenditure of each item is limited to its revenue and the specific usage is ruled by relevant regulation
E.g. the proceeds from transfer of land-use rights should be spent on urban infrastructure construction, compensation for dismantled houses, compensation for acquired land, and preparation of the ground for further development
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

9. Dr.DU Li,Depertment of Pulbic Economics,Fudan University
Four Parallel Budgets
State capital budget
Major revenue:
Dividends or other earnings received from state-owned enterprises
Major expenditure:
Investment made to the state-owned enterprises
Subsidies paid the state-owned enterprises
Now only state-owned enterprises affiliated to central government need to pay dividend, and this budget is only prepared at the central level.
The local state capital budget is still under construction.
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

10. Dr.DU Li,Depertment of Pulbic Economics,Fudan University
Four Parallel Budgets
Social security fund budget
Major revenue:
Social security contributions paid by individuals and enterprises
Major expenditure:
Payment made by the social security programs
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

11. China’s Budget System Reform
China is trying to make the fiscal budget more transparent, more performance-oriented and binding.
The new budget law (revised on August 31,2014 and will take effect in Jan 1,2015) emphasizes the following field of reforms:
Complete and transparent budget
Medium-term budget
Performance budget
Sustainable local public debts management
12:32:13
Dr.DU Li, Department of Public Economics, Fudan University

12. About The Budget Transparency
The public is not satisfied with the budget transparency.
The new Budget Law requires more details of the budget be published or submitted to the People’s Congress.
The preparation of financial reports on accrual basis indicating assets and liabilities of the governments at various levels is required by the Budget Law.
12:32:13
Dr.DU Li, Department of Public Economics, Fudan University

13. About Medium-term Budget
China’s Budget year is the calendar year.
Annual budget cannot well match the medium-term economic plan (i.e. the 5-year plan) and adapt to the economic fluctuations.
The new Budget Law requires to establish the multiple-year budget balancing mechanism so the medium-term budget (3-year rolling budget) is under construction.
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

14. A simple medium-term fiscal framework

15. The relationship of major factors to be considered
GDP growth rate
National economic and social plan
（investment、GDP）
Fiscal revenue
Ratio of debt to fiscal revenue,
Ratio of debt to GDP,
Ratio of debt service to fiscal revenue
Deficits(debts)
Fiscal expenditure

16. The determination of the medium-term budget (based on economic growth target)
GDP growth rate
National economic and social plan
（investment、GDP）
Fiscal revenue
Ratio of debt to fiscal revenue,
Ratio of debt to GDP,
Ratio of debt service to fiscal revenue
Deficits(debts)
Fiscal expenditure

17. The determination of the medium-term budget (based on debt constraint)
GDP growth rate
National economic and social plan
（investment、GDP）
Fiscal revenue
Ratio of debt to fiscal revenue(100%),
Ratio of debt to GDP(20%),
Ratio of debt service to fiscal revenue(15%)
Deficits(debts)
Fiscal expenditure

18. About Performance Budget
The performance evaluation of budget expenditure is required by the new Budget Law.
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

19. About Local Public Debts Management
The new Budget Law allows local governments to issue debts upon approval of central governments.
The former local financing platform companies shall not raise funds for the local governments in the future.
But the local governments are encouraged to finance local infrastructure investments through PPP (Public-Private Partnership).
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

20. China’s “Land Related Public Finance”
Local government
Capital injection (mainly land-use rights)
Local financing platform
Debt financing
Infrastructure construction
SOEs that raise funds for local
infrastructure programs but
cause public debt risks.
Their financing function has
been stopped by the new
Budget Law.
Urbanization
Economic growth
Tax revenue
Land-related proceeds

21. Typical Model of Public-Private Partnership
Government
PPP agreement
Loan agreement
Project company
Bank
Contract agreement
Investors
Project operator
Fees
Users
Under PPP model, the government does not borrow from the private investors but
share gains, costs and risks with the private investors for the infrastructure
construction.
12:32:13
Dr.DU Li,Department of Public Economics,Fudan University

22. China’s Intergovernmental Fiscal Relationship
The 1994 tax-sharing reform
Theoretical background:
The fiscal federalism: role of the public sector shall be performed by multi-level governments and fiscal revenue shall be allocated among various levels of governments accordingly
The practical background:
Vertical fiscal disparity before 1994 (too small share of central revenue)
The result:
Actually, the 1994 tax-sharing reform just change the direction of vertical fiscal disparity.
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

23. Central vs. Local (Fiscal Revenue)
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

24. Central vs. Local (Fiscal Expenditure)
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

25. Dr.DU Li,Depertment of Pulbic Economics,Fudan University
Tax Sharing Rule
Consumption tax: central
Customs duty: central
VAT：central 75%, local 25%
Business Tax： local (But the tax paid by the railway department, the headquarters of banks and insurance companies goes to central government)
IIT and EIT： central 60%, local 40%
Other taxes: local
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

26. Intergovernmental Grants
Theoretically, the intergovernmental grants shall be designed to correct the fiscal disparity.
General grants
Special grants based on programs
(Matched grants)
But in practice, the intergovernmental grants are far from effective in correcting the vertical fiscal disparity.
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

27. Dr.DU Li,Depertment of Pulbic Economics,Fudan University
China’s Fiscal Policy
Policy targets
To achieve stable economic growth
To promote structural transformation
To encourage resource conservation and environmental protection
To encourage technological innovation
To achieve fairness of distribution
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

28. Dr.DU Li,Depertment of Pulbic Economics,Fudan University
China’s Fiscal Policy
Policy targets
To achieve stable economic growth
Policy measures
Government expenditure expansion (4 trillion yuan stimulus package)
Structural tax-cut
In the recent economic downturn, China expanded the government expenditure and took a series of structural tax cut measures, which contribute much to the economy’s V- shape recovery .
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

29. Fiscal investment and GDP
Total investment
State-owned sector investment
Fiscal investment
National economic and social plan
Budget plan

30. Dr.DU Li,Depertment of Pulbic Economics,Fudan University
China’s Fiscal Policy
The recent economic downturn and V-shape recovery
%, year-on-year
Quarterly GDP growth rate,China
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

31. Central and Local FA Investment (year-on-year growth rate:%）
Local FA investments play an important role for the V-shape recovery, which are mainly conducted by the local financing platform companies.

32. Estimation of China’s Government Debts
(Year:2010)
Source
Estimation method
Debt( billion yuan)
Data source
Central government domestic debts
66,98.8
Official data
Central government foreign debts
56.01
Local government debts
5730
Local financing platform debts
4970
Former ministry of railway debts
1890
　Website data
Policy banks debts
3204
Published Report
NPLs of state-owned commercial banks
Attribute 10% to government
30.8
Social security fund deficits
3700
Published report
Total debts
262,97.11
GDP
401,51.28
Debt-GDP ratio
65.50%
Compared of other major countries, the debt-GDP ratio is not quite high,
but some scholars doubt the reliability of the statistics of public debts.

33. Debt-GDP Ratio of Some Countries
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

34. Dr.DU Li,Depertment of Pulbic Economics,Fudan University
China’s Fiscal Policy
Policy targets
To promote structural transformation
To boost the domestic demand, esp. the household consumption
To encourage the development of advanced manufacturing and modern services industry, e.g. IT,R&D…
Try to achieve the balanced development of urban-rural areas and east-middle-west areas
Policy measures
VAT transformation and enlargement
Tax incentives, subsidies, transfer to the poor, public housing projects…
Intergovernmental grants to the less-developed regions
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

35. International Comparison of the Final Consumption Rate
Developed countries
Developing countries
US2010
88%
INdia2011
70%
UK2011
87%
Brazil2011
81%
Germany2011
77%
Russia2011
69%
Japan2010
79%
Argentina2011
75%
World average 2006
China 2011
50%
China’s high economic growth in the past 30 years is mainly driven by investment, and the consumption rate is particularly high.
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

36. Dr.DU Li,Depertment of Pulbic Economics,Fudan University
China’s Fiscal Policy
Policy targets
To achieve fairness of distribution
Policy measures
IIT reform
House property tax reform
Improvement of the social relief system
Improvement of the social insurance system
Intergovernmental grants to the less-developed areas
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

37. The Gini Coefficient in China
China has experienced widening income gap in the past 30 years which is indicated by the high level of Gini coefficient.
Inequality in distribution is a major concern of China’s sustainable economic development.
12:32:13
Dr.DU Li, Department of Public Economics, Fudan University

38. Regional Disparity of Disposal Income
Year
Urban
Rural
east
middle
west
2005
13375
8809
8783
4720
2957
2379
2006
14967
9902
9728
5188
3283
2588
2007
16974
11634
11309
5626
3878
3033
2008
19203
13226
12971
6598
4453
3518
2009
20953
14367
14213
7156
4793
3816
2010
23273
15962
15806
8143
5510
4418
The income gap between urban and rural regions contribute the most to the
overall inequality of income distribution.
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

39. Gini Coefficient for the Tax Revenue at Provincial Level
total
Primary
industry
Secondary industry
Tertiary industry
2003
0.48
0.73
0.44
0.54
2004
0.74
0.55
2005
0.47
0.71
0.43
2006
0.75
2007
0.49
0.69
0.58
2008
0.65
The regional income gap is also considerable.
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

40. Contribution of the Industries to the Regional Gap of Tax Revenue
Gini
Primary
industry
Secondary industry
Tertiary industry
2003
0.04
55.20
46.64
2004
0.03
54.42
46.07
2005
54.27
47.58
2006
0.06
52.74
49.55
2007
47.77
55.04
2008
0.31
48.53
55.53
The service industry contribute much to the variances of regional revenue.
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

41. Contribution of the Industries to the Regional Gap of Tax Revenue
year
mining
Manufac-turing
Supply of Electricity,
gas and water
Construc-tion
Transportation,
post and ware-house
IT, software
Retail and whole-sale
finance
Real estate
Leasing and business services
2003
6.72
44.86
5.72
3.89
2.55
3.12
14.67
4.50
5.98
4.21
2004
8.50
43.65
5.05
3.98
2.64
2.60
15.02
3.77
6.81
4.04
2005
10.03
43.46
4.78
4.05
2.73
2.46
14.84
6.01
7.45
4.10
2006
10.52
41.76
5.00
3.94
2.68
2.58
14.65
8.18
7.70
4.15
2007
8.43
37.98
4.42
3.49
2.32
2.30
13.65
12.03
8.07
3.52
2008
9.73
38.90
3.96
3.56
2.71
2.47
14.54
15.73
7.69
3.27
The importance of manufacturing industry for local tax revenue is falling and
that of finance and real estate industry is rising.
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

42. Dr.DU Li,Depertment of Pulbic Economics,Fudan University
China’s Fiscal Policy
Policy targets
To encourage resource conservation and environmental protection
To encourage technological innovation
Policy measures
Incentives in EIT
Resource tax reform
Consumption tax reform
Subsidies to relevant enterprises
...
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

43. Local Fiscal Policies (Shanghai pilot FTZ)
Two-year 100% subsidy (tax-refund) and 50% subsidy for the rest operating years for the newly-established enterprises in selected industries such as logistics, shipping, storage, foreign trade, financial lease, manufacturing, technological service, etc. on basis of the revenue accrued to the local government
Three-year 100% subsidy (tax-refund) and 50% subsidy for the rest operating years for the operational centers (of MNCs) on basis of the revenue accrued to the local government
Awards granted to the management members
Additional subsidies for the housing rents of the employees
Additional subsidies for the interests expenses
Financing guarantees ……
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

44. Dr.DU Li,Depertment of Pulbic Economics,Fudan University
Q&A Thank you!
12:32:13
Dr.DU Li,Depertment of Pulbic Economics,Fudan University