Expert urges fiscal reform for pension

The central government will likely assume more expenditure responsibility in the pension and healthcare sectors, and it is advisable for the country to increase the centralization of the fiscal and tax systems for pension and healthcare, said Yao Yang, director of the China Center for Economic Research at Peking University.

The senior economist also said it is important to control local government debt by improving transparency in raising commercial debt.

He made the remarks in an exclusive interview with China Daily after the third plenary session of the 20th Central Committee of the Communist Party of China concluded on July 18. The plenum's official resolution outlined key reform orientations in the fiscal and tax systems.

Some provinces in Northeast China are running a deficit in their pension systems while in the coastal regions, most provinces are running a surplus, Yao said, adding the central government is using the surplus from the eastern provinces to subsidize the deficits of some other provinces.

"The central government should do more on this front to have more centralization of the pension system. Equally important is more centralization of the healthcare system."

With regard to solving the local government debt issues, Yao said the key is including local governments' commercial debt in their annual budgets, so that all their debt can be transparent and monitored by the authorities concerned.

"Local government bonds are monitored by the central government and need to be approved by the central government. Yet, their commercial debt is raised through local government financing vehicles that are defined as commercial entities, which can raise commercial debt over which the central government has no control," Yao said.

"I think it's imperative for local governments to include such commercial debt in their annual budgets, so that they can be transparent and monitored by the central government as well as by local people's congresses."

Including commercial debt in government budgets is the only way to control local government debt, he said, adding the central government is already trying to press ahead in that direction by asking local governments to include commercial debt in their respective budgets.

According to the resolution adopted by the key plenum, China will deepen reform of the fiscal and tax systems, which include improvements to the budget system and strengthening of unified management of all fiscal resources and budgets.

It also vowed to establish a system for monitoring and regulating all local government debt as well as long-term mechanisms for preventing and defusing hidden debt risks. The country will move faster to reform and transform local government financing platforms, it said.

Yao said the local government financing vehicles will remain important in local economic development, because of the role they play in infrastructure construction.

Yet, the borrowing activities of such financing vehicles must become fully transparent, he stressed.

"We still need to allow local governments to raise commercial debt, but we need to put a firewall in place. If you borrow commercially, you have to make everything transparent," Yao said, adding many local government financing vehicles currently tend to package all their projects for financing, and such an approach may not be desirable always.

"You will have to tell investors about the plans for your projects, and how much subsidy is earmarked by local government for each of them, so that investors can have the right pricing for each project. You cannot mix them all up and present a package to investors," he said.