The reform of public finance management in China: introductory overview of issues and contributions of the symposium Part 1.

Author:Liu, Rong
Position::Report
 
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  1. INTRODUCTION

    Since initiating economic liberalization in 1978 and subsequent economic and fiscal system reforms, the People's Republic of China (hereafter called China) had a remarkable record of double digit economic growth over the past three decades. This sustained growth has resulted in a record of economic development and poverty alleviation unparalleled in the economic history of the world. Today PRC ranks as the world's largest exporter and the manufacturer and the second largest economy in the world, second only to the USA. In 1978 roughly 2/3rd of China's population was below the poverty line (earning less than $1/day in purchasing power parity). Today less than 3% of PRC's population is below this threshold. While OECD countries are languishing under a mounting public debt burden with unsustainable public finances, China has emerged largely unscathed from global fiscal and financial crisis enjoying a rising positive net worth and is in sound fiscal health with large reserves on hand to deal with any emerging crisis.

    In spite of the glorious achievement of the past several decades, China is now faced with formidable challenges--some arising from the world economic slowdown with adverse impacts on China's exports and growth prospects and others of its own making resulting from rapid urbanization and growth without having adequate safeguards against urban-rural divide, urban sprawl, concentration of wealth, environmental degradation and social exclusion. As the reform of the fiscal system is potentially a powerful instrument to deal with emerging challenges that affect the quality of life and economic and social outcomes for Chinese residents, this special edition of the journal (in two parts) is devoted to identifying issues and seeking solutions to the problems faced by the public finance management system in China. Part 1 is primarily concerned with division of fiscal powers and financing issues whereas Part 2 deals with an analysis of the structure of government; local budgeting reforms; the reform of intergovernmental finances; implications of existing fiscal policies and newer reform initiatives on equity of opportunity; and fiscal health of counties and coordinated urban-rural development. This introductory overview highlights the issues and challenges and directs the reader's attention to specific contributions of the symposium issue Part 1, providing an analysis and suggestions for reform.

  2. MAJOR CHALLENGES OF FISCAL SYSTEM REFORM

    Major fiscal system reform issues include: (a) defining the role of state and government in future China; (b) rethinking the structure of government for modern China; (c) clarifying the role of various orders of government especially in areas of shared responsibility; (d) modernizing the tax system to enhance revenue adequacy, international competitiveness, environmental protection, fairness and transparency and creating a sustainable system of local finances; (e) reforming the intergovernmental finance to ensure revenue adequacy for subnational governments, strengthening common economic union and ensuring that all citizens regardless of their place of residence have access to reasonably comparable levels of public services at reasonably comparable burdens of taxation; (f) having a comprehensive and transparent budgeting system that provides a timely and comprehensive view of all government operations and service delivery outcomes to serve as the basis for improved citizen participation in public affairs and holding the government to account; (g) permitting responsible and accountable access to capital market finance to local governments and having appropriate fiscal rules and regulatory framework to ensure prudent and sustainable system debt finance and management; and (h) creating incentives for coordinated...

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