China Newsweek reporter/Chen Weishan

Published on May 2023, 5, Issue 22 of China Newsweek

According to this year's central financial budget, the budget for transfer payments from the central government to local governments in 2023 will be 100625 billion yuan, an increase of 3.6% over last year's implementation number, breaking through the 10 trillion yuan mark for the first time. In the past decade, the number of transfer payments from the central government to local governments has been rising, from less than 2013 trillion yuan in 5 to more than 10 trillion yuan.

Due to the differences in fiscal revenue between provinces, the transfer payment system has always played an important role in China's fiscal system in order to achieve equal levels of public services in various places.

Finance Minister Liu Kun said that this year to implement a "proactive fiscal policy", and one of the "positive" manifestations is to "increase the efforts to promote the sinking of financial resources, further strengthen the transfer payments from the central government to local governments, and tilt towards difficult and underdeveloped areas".

At present, people are paying attention to the transfer payments from the central government to the local government, not only paying attention to the record figures, but also paying attention to the contradictions between local income and expenditure behind the figures and the changes in the relationship between the central government and the local government.

Sichuan and Henan ranked the top two in terms of "receipts"

"The number of transfer payments from the central government to local governments exceeding 10 trillion yuan is indeed attracting attention, but from a relative point of view, it has always accounted for about <>% of the central financial expenditure, and has not increased significantly." Professor Lu Bingyang, head of the finance department at the School of Finance at Chinese Minmin University, told China Newsweek.

In fact, after the reform of the tax-sharing system, transfer payments have always occupied the "lion's share" of central financial expenditure. However, compared with the years before the outbreak of the epidemic, since 2020, the proportion of transfer payments in central fiscal expenditure has increased slightly, from less than 70% to more than <>%.

Taking 2022 as an example, the number of transfer payments from the central government to local governments will be about 9.7 trillion yuan, and the local public budget expenditure in that year will exceed 22 trillion yuan, accounting for more than <>%.

Qiao Baoyun, dean of the China Institute of Public Finance and Policy at the Central University of Finance and Economics, told China Newsweek that the existence of transfer payments is determined by the fiscal system, and after the reform of the tax-sharing system, tax revenue is concentrated in the central government, and transfer payments have become the most important lever for the central government to support local financial resources.

Since the Ministry of Finance announced the sub-regional situation of central-to-local transfer payments in 2015, Sichuan and Henan have been the top two in terms of the amount of funds received. The two provinces together receive more than 10 per cent of the total for the year. In 2023, the central government's transfer payment budget to Sichuan will be 5882.5 billion yuan, and Henan's will be 5095.<> billion yuan.

The third to sixth places are mostly Hunan, Hubei, Hebei and Yunnan provinces. Among the provinces with transfer payment budgets of more than 4000 billion yuan this year, Hunan, Hubei is still Hunan, and Hebei is close to 4000 billion yuan. In contrast, the transfer payment budget of Shanghai, Zhejiang and Tianjin is less than <> billion yuan. Such interprovincial distribution results are not surprising.

The transfer payment from the central government to the local government is mainly composed of two parts, general transfer payment and special transfer payment, the former accounting for about 10%. General transfer payments are mainly used to ensure the equalization of public services among provinces, and economically less developed areas receive higher general transfer payments than developed regions, because their income is insufficient to support public service expenditures. Balanced transfer payments in general transfer payments this year increased by 3.<>% year-on-year.

"Ensuring the equalization of public services is the first priority of general transfer payments, and the focus is now on meeting the needs of the 'three guarantees' (ensuring basic livelihood, ensuring wages, and ensuring operation)." Qiao Baoyun told reporters that the central government's allocation of local transfer payments is not "arbitrary", although it has not yet been legislated, but the distribution according to the transfer payment coefficient calculated by the formula mainly considers the necessary expenditure of local public services, income and other factors.

Taking the basic pension budget of transfer payments from the central government to local governments in 2023 as an example, the budget totals 9277.63 billion yuan, and Sichuan has received the most funds, reaching 1023.18 billion yuan, followed by Liaoning (938.32 billion yuan), Hubei (739.77 billion yuan), Henan (721.84 billion yuan), and Heilongjiang (713.16 billion yuan).

According to the explanation, the distribution logic of basic pension transfer payments is linked to the number of local retirees, and then tilted towards the central and western regions. For example, the "basic endowment insurance subsidy fund for urban and rural residents" in the basic pension is fully subsidized for the central and western regions, and only 50% of the subsidy is given to the eastern region.

According to the seventh population census, Sichuan's outflow population exceeded 259 million, while the inflow population was only 2021.2 million. In 25, among the urban employees participating in pension insurance in Sichuan, the ratio of active and retired personnel was 1.2:65, that is, this ratio was not only far lower than Guangdong, Fujian and other places, but also lower than the national average of 1.<>:<>.

Obviously, as the contradiction between local government revenue and expenditure intensifies, the role of central transfer payments is becoming more and more important. But is the growth of central-to-local transfers sustainable? This involves where the money for central-to-local transfers comes from.

"In addition to tax revenue, an important source is the fiscal deficit. Therefore, to discuss whether the growth of central-to-local transfer payments is sustainable, the essence is to discuss whether the fiscal deficit is sustainable. Qiao Baoyun explained that the increase in the deficit rate is due to the increase in downward pressure on the economy, and the central government uses it to calm economic fluctuations, but if the economy continues to decline, the deficit will inevitably be difficult to sustain. Conversely, if the deficit rate is raised and then increased by the transfer of central-to-local governments, which plays a role in boosting the economy, the deficit can be sustained.

Qiao Baoyun believes that this is a dilemma for the central government, and at a time when the economy is recovering, transfer payments from the central government to local governments are essential.

The contradiction between local government revenue and expenditure is difficult to resolve

According to data from the Ministry of Finance, local general public budget revenue fell by 2.1% year-on-year last year, while general public budget expenditure increased by 6.4% over the previous year. In terms of provinces, a total of 21 provinces saw a year-on-year decline in fiscal revenue, and only 5 provinces achieved growth, mostly resource-based provinces such as Shanxi, Inner Mongolia and Shaanxi.

In the context of the intensification of the contradiction between local government revenue and expenditure, the self-sufficiency rate of local governments has declined, and they have increasingly relied on central transfer payments to fill the gap between income and expenditure, which is the actual contradiction behind the record transfer payments from the central government to local governments.

In February this year, the Chinese Academy of Fiscal Sciences released the "2 Local Financial and Economic Operation Survey Report" (hereinafter referred to as the "Report"). The Report mentioned that due to the obvious impact on local income, local governments have become more dependent on transfer payments from the central government to local governments to maintain basic operations.

The most intuitive embodiment is the further decline in the self-sufficiency rate of local finances. In 2022, the local fiscal self-sufficiency rate (local level general public budget revenue/local general public budget expenditure) was 48.4%, down 4.3 percentage points from the previous year, and has decreased by 2014.10 percentage points from the 3 high.

The report shows that in 2022, only resource-based provinces are improving their fiscal self-sufficiency rates, with the northeast and eastern coastal areas experiencing the largest declines. The fiscal self-sufficiency rate of the four resource-based provinces of Shanxi, Inner Mongolia, Shaanxi and Xinjiang increased by about 2021 percentage points compared with 3, mainly due to the relatively high commodity prices in 2022. The fiscal self-sufficiency rate in the northeast and eastern coastal regions fell more than in other regions, with Shanghai and Jilin, which were more affected by the epidemic, with the largest declines, 11.2 percentage points and 9.9 percentage points respectively.

How should the decline in local fiscal self-sufficiency be viewed?

"When the downward pressure on the economy is greater, local fiscal revenue declines, and expenditure is relatively rigid, which will inevitably lead to a decline in the fiscal self-sufficiency rate." Qiao Baoyun pointed out that the general public budget expenditure is more directed to public services, and the level of public services is difficult to say, when the economy faces volatility difficulties, the central government needs to expand the transfer payment quota to stabilize.

"However, the transfer payment from the central government to the local government is equivalent to 'blood transfusion', and after all, it is necessary to improve the local 'hematopoietic' function, and the medicine cannot be eaten." Qiao Baoyun also reminded that the local fiscal self-sufficiency rate is also the result of the design of the fiscal system. "By adjusting the design of the fiscal system, the self-sufficiency rate of local finance can be improved, for example, in extreme cases, the self-sufficiency rate of local finance can be increased to 100%, how to ensure central financial expenditure?" Therefore, it is not advisable to give too much attention to the significance of a single indicator of fiscal self-sufficiency rate. ”

"The fiscal self-sufficiency rate is not the only indicator to measure fiscal health, another very important indicator is fiscal quality, that is, the proportion of tax revenue to fiscal revenue, if the proportion of non-tax revenue such as fines is relatively high, it is difficult to say that it is 'fiscal health'." He believes that given that the local fiscal self-sufficiency rate is affected by both fiscal system design and short-term economic fluctuations, fiscal quality may be a more important indicator of fiscal health.

In the efforts of local governments to "increase revenue and reduce expenditure", non-tax revenue does play an important role. In 2022, the national non-tax revenue will reach 3.7 trillion yuan, a year-on-year increase of 24.4%. In some provinces, the growth rate of non-tax revenue was much higher than the growth rate of tax revenue, such as Jiangsu's non-tax revenue growth rate of 33.2%, and tax revenue fell by 5.4%.

Judging from the situation in the first quarter of this year, local fiscal revenue is improving as a whole. According to the latest data from the Ministry of Finance, in the first quarter of this year, the national local general public budget revenue at the same level was 34738,5.3 billion yuan, an increase of <>% over the same period last year. This growth rate is <> percentage points higher than in the previous two months.

Most provinces have achieved growth, but only a few provinces such as Henan and Ningxia have achieved rapid growth of more than 10%. In addition, there are also declines in fiscal revenue in Shaanxi and Hainan.

The fiscal revenue of the resource-based province of Shaanxi in the first quarter of last year increased by about 34% year-on-year, while under the influence of the high base in the same period last year and the decline in coal prices this year, Shaanxi's general public budget revenue in the first quarter of this year reached 922.45 billion yuan, down 4.46%.

Although entering 2023, with the end of the epidemic and the recovery of economic growth, all provinces are still more cautious about fiscal revenue growth expectations, most of them expect fiscal revenue and expenditure contradictions to remain prominent and continue to maintain a tight balance, and 18 provinces set the expected growth rate of fiscal revenue in 2023 at 4%~6%.

For example, although Shanghai, which will see a 2022.2% decline in fiscal revenue in 1, has the advantage of a low base, it still believes that after the impact of the epidemic, the continuous pressure on enterprise operations, the continuous pressure on the chain of stable chains, and the pressure on stable employment continue to be carried out, and the foundation for fiscal revenue increase needs to be further consolidated.

Obviously, the growth of local government revenue and the alleviation of revenue and expenditure contradictions are closely related to the operation of the economy, and at a time when the prospects for sustained economic recovery are still uncertain, it is difficult for local governments to say that the contradictions between revenue and expenditure have eased, and their dependence on central transfer payments will continue, which is also an important reason for the record of central to local transfer payments this year.

How to balance "decentralization" and "concentration"

How to make limited transfers more efficient is another important issue. In fact, behind the rising amount of transfer from the central government to the local government, the structure is also changing, and the proportion of general transfer payments is increasing.

Lu Bingyang told reporters that after 2000, special transfer payments used to account for a relatively high proportion, mostly between 30%~40%, and even reached a high level of about 44%. Special transfer payments naturally have their advantages, but the disadvantages are equally obvious. "Each department manages the corresponding special transfer payment projects, resulting in fragmented management of fund use and is prone to 'running and dripping'. In particular, special transfer payments are allocated according to projects, and the information transmission chain is too long, resulting in the loss of capital allocation efficiency when the information asymmetry between superiors and subordinates is obvious. ”

In order to simplify information, almost every county in China has some labels, such as key counties for poverty alleviation and development, large counties for grain production, demonstration counties for ecological construction, "land of cows" and "land of rice" and so on. Applying these labels to lower levels of government can help them attract the attention of higher levels of government and secure appropriate transfer funds.

In 2015, the State Council issued the Opinions on Reforming and Improving the Central to Local Transfer Payment System, one of the core of which is to improve the general transfer payment system.

After 2016, China began to promote the reform of fiscal power, which brought about the reform of expenditure responsibility. Especially after 2018, the reform of fiscal power and expenditure responsibility in various fields, including transportation, medical and health, has been promoted, which involves the division of common financial power and expenditure responsibility between the central and local governments, so the addition of common financial power transfer payment in 2019 has become an important component of general transfer payment, and the scale reached 3.9 trillion yuan that year.

Lu Bingyang told reporters that now general transfer payments can be broken down into balanced transfer payments and transfer payments for common fiscal power. However, unlike some countries, which divide transfer payments into conditional transfers and unconditional transfers, general transfers are not unconditional transfers. Among them, the local government has the right to use the balanced transfer payment, while the transfer payment of common fiscal power requires that the fiscal funds be used for the corresponding fiscal power.

"The design of the transfer payment system needs to find a balance between mobilizing local enthusiasm and improving the efficiency of capital allocation, if the transfer payment funds are used unconditionally, although local enthusiasm can be mobilized, but the funds can be allocated according to local government preferences, and flow in a direction that better reflects the performance of local governments." Lv Bingyang analysis.

"Since there has been a call for local governments to have more autonomy over transfer funds, the scale of general transfer payments is expanding, while the scale of special transfer payments is shrinking." Qiao Baoyun believes that the basis for the design of the transfer payment system is the division of central and local powers and expenditure responsibilities, as well as the framework of income division. The difference between local income and expenditure is made up through transfer payments from the central government to the local government.

Because of this, behind every adjustment of the local transfer payment system by the central government is an adjustment of the relationship between the central government and the local government.

In addition to transfer payments from the central government to local governments, the transfer payment arrangements from provinces to municipalities and counties under the jurisdiction are different, and they have entered a period of intensive adjustment since last year, hoping to strike a balance between "decentralization" and "concentration" of financial resources to cope with more grassroots financial difficulties.

In June 2022, the General Office of the State Council issued the Guiding Opinions on Further Promoting the Reform of the Fiscal System Below the Provincial Level (hereinafter referred to as the "Guiding Opinions"), one of the core contents of which is to strengthen the provincial regulation and coordination capacity, especially in areas with high pressure on the "three guarantees" at the grassroots level and large per capita expenditure gap between regions, by increasing the proportion of provincial income sharing, concentrating more financial resources on transfer payments to cities and counties, and alleviating grassroots financial difficulties.

In recent years, just as the central government has increased transfer payments to local governments, provincial finances are also increasing transfer payments to city and county finances. In 2022, the growth rate of transfer payments from Jilin and Heilongjiang and other provincial governments to the city and county levels reached the highest in history. Yunnan also proposed that in 2023, it will also maximize transfer payments, especially general transfer payments.

In this context, it is crucial to increase the proportion of provincial income sharing proposed in the Guiding Opinions. For example, Hubei proposed to appropriately enhance the macro-control capacity of provincial finance, promote the reform of the financial system below the provincial level, further optimize the scope, standards and proportion of provincial revenue sharing, strengthen the overall planning of various types of funds, assets and resources at the provincial level, and improve the division of financial powers and expenditure responsibilities between provinces and cities and counties.

Qiao Baoyun told reporters that increasing the provincial government's ability to regulate and control finance is also to enhance the provincial government's ability to deal with problems when the downward pressure on the economy is greater. "It is not without debate whether provincial governments should concentrate or decentralize more financial resources, and now the emphasis on concentration is also to more effectively cope with the complex situation under downward pressure on the economy, but each province also needs to balance its own 'blood transfusion' capacity with grassroots 'hematopoietic' capacity, and decentralize financial resources so that it can better cultivate local 'hematopoietic' functions."

The reporter also noted that the focus of the reform of the fiscal system below the provincial level is not all "concentration", and Hainan proposed to give more tax benefits to cities and counties from 2023 to increase the financial self-sufficiency rate of cities and counties.

Lu Bingyang believes that the guidance is only "guidance" and does not strictly require provincial governments to act in this way, because the situation varies greatly from province to province. "From the perspective of fiscal expenditure responsibility, the downward shift is the overall trend, which is also the reason for the financial difficulties of some counties and townships." In the arrangement of financial power, provincial governments will give overall consideration to mobilizing local enthusiasm and risk sharing, which is manifested in a completely different orientation such as decentralization or centralization of financial power. For example, for some taxes with large income fluctuations, the provincial government will collect the revenue of the tax and then transfer it to the local government through transfer payments, which means that the provincial government bears the risk of fiscal revenue fluctuation and better protects local financial resources. ”

China Newsweek, Issue 2023, 18

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