New fiscal system to better serve the country

According to the Central Economic Work Conference held in December, the fiscal system needs a new round of reform.

This reform has to, however, tackle several issues.

First, the unclear relationship and boundary between the government and the market have continuously expanded the government's bottom line responsibilities, which create a contradiction between limited financial resources and unlimited expenditure, leading to financial difficulties.

Second, there is also an unclear boundary between central and local government power and responsibilities, with local governments taking on too many responsibilities and expenditures while central government spending is far below the international average.

Under a system where decisions made by the central government are implemented by local governments, the debt of local governments continues to rise.

Third, lacking an established local taxation system, fiscal resources are not well allocated nationwide, and it is necessary to build a more incentive-compatible system to better enthuse local governments.

Besides, transfer payments are not standardized. In particular, the transfer payments for shared causes between the central and local governments are relatively huge.

Moreover, the reform of the subprovincial fiscal systems needs to be further deepened, as the sub-provincial fiscal systems of different regions are not well regulated.

Several challenges

In the short term, the new round of fiscal reform needs to solve problems arising from a declining macro tax burden rate, tight fiscal balance, higher local government debt risk and the land finance issue.

Over the medium term, China needs to ensure fiscal sustainability through institutional reform and avoid fiscal crisis.

On a long-term basis, the country needs to build a new fiscal system to serve the national agenda, which includes common prosperity, high-quality development, a unified market, and development and security coordination.

For that, the country needs to motivate all parties, including the central and local governments, enterprises and scientists through reshaping of the incentive and regulation system, in order to achieve a balance between efficiency and fairness, as well as improving fiscal sustainability.

From an overall perspective, the crux of fiscal system reform is about the functioning of the government.

Clarifying the boundary between government functioning and the market mechanism is a precondition for a new round of fiscal system reform.

The "tightening balance" in China's fiscal situation is rooted in the contradiction between limited fiscal resources and unlimited fiscal expenditure responsibilities, which to some extent is due to the increasingly unclear boundary between the government and the market, or the expanding responsibilities of the government, as reflected by fiscal activities to defuse economic and social risks.

To deepen reform, we must streamline administration and delegate power, lay off redundant personnel, and deepen the reform of the administrative system and social security system, as the fiscal reform needs coordinated reforms in other fields.

The first task is to clarify the relationship between government and the market and set clear government responsibility and personnel scales.

Reforms in administrative institutions and public organizations must be deepened to strengthen the performance of the management. A large number of public institutions will either become nonprofit organizations or compete in the market to take responsibility for their own profits and losses.

The second task is to deepen reforms in the central and local fiscal systems, gradually transferring administrative powers and expenditure responsibilities to the central government and reducing local government expenditure responsibilities and financial pressures.

Local governments have neither the ability nor the motivation to handle affairs with strong externalities, or gradually improve public security, food and drug supervision, pension insurance and other matters under the vertical management of central government departments.

It is important to establish a performance assessment system and a financial evaluation system that match the multiple-objective governance system, to prevent continuously expanding local expenditure responsibilities due to the central government's performance assessment of local governments.

It is also important to establish an accountability mechanism to evaluate the effects of policies before and after they are introduced, to prevent risks in other fields from spreading to the fiscal system.

Tax reforms

Tax and fee reductions must shift from pursuing quantity to effect, and structural tax increases must be conducted in areas that have little impact on ordinary residents but are conducive to promoting green development and narrowing the gap between the rich and the poor. It is necessary to rethink and evaluate the effects of large-scale tax and fee reductions, and implement tax and fee reductions based on whether they are conducive to the construction of the new development pattern, to sci-tech innovation, or to promoting market vitality and economic and social stability.

The country can also build a more pragmatic local tax system based on shared taxes, and promote the reform of personal income tax to reduce the burden on working people while strengthening tax collection and management, and ensure that the scale of personal income tax grows and better plays its due role in regulating income distribution.

It can also reform the excise tax and expand excise tax targets from tobacco, alcohol and automobiles to highly-polluting, intensive energy-consuming, or high-end service industries, such as high-end clubs and hotels, to move tax targets from the production side to the consumption side, and gradually decentralize tax power in regard to local areas and enrich local taxes.

Apart from tax revenues, incomes of the government as property owner should also be included in budget management, to reduce a situation where State-owned resources become exclusive revenue sources for only some places.

The country can deepen the reform of the social security system and avoid long-term overreliance on the general public budget subsidies for social security.

Fiscal expenditures must be standardized, and the performance and structure of fiscal expenditures should be further optimized, to raise expenditure efficiency and use limited fiscal funds wisely.

We should also further expand the scope of budget disclosure and improve the timeliness and normative uniformity of budget disclosure to help taxpayers better supervise the government.

Currently, provincial government budget disclosure has made great progress, but there are still problems such as untimely, insufficient, or nonstandardized disclosure at lower-level governments.

We must contain the hidden debt of local governments from growing further, address the existing implicit debt issue and improve the government debt management system.

For instance, we can optimize the debt structure among regions, and moderately relax the debt cap for urban agglomerations and areas with net population inflows, while strengthening debt performance management, and improving the match between liabilities and assets, and that between costs and benefits.

China can also optimize its debt structure, such as taking on more central government debt while reducing local government debt and special-purpose local government bond issuance, and issuing long-term treasury bonds for construction.

The writer is chief economist at Yuekai Securities.

The views do not necessarily reflect those of China Daily.