11 - Fiscal Relationship between the Central and Local Governments

Summary

Chapter 11 analyzes the fiscal relationship between the central and local governments. It first examines China’s budget system and the central-local tax sharing system, the fiscal imbalance between local fiscal revenues and expenditures, and the massive fiscal transfers from the central to local governments. It then discusses fiscal decentralization through extra-budgetary revenue collection, land sales, and bank borrowing by local governments. Next, it discusses the fiscal imbalance of the central and local governments and regional fiscal disparities. Policy suggestions on how to improve the central and local fiscal relationship are provided in the end, including the increase in local government revenue and the shift of some expenditure responsibilities from local governments to the central government, as well as granting local governments more fiscal freedom.