Central-local fiscal ties in the spotlight

China is expected to make more efforts to optimize the fiscal relationship between the central and local governments, thereby strengthening fiscal sustainability while ensuring macroeconomic adjustment capability, to further unleash development potential of the Chinese economy, experts and a senior government official said.

In an article published in People's Daily on Tuesday, Han Wenxiu, executive deputy director of the Office of the Central Committee for Financial and Economic Affairs, said it is a key fiscal and tax reform task for China to establish a fiscal relationship between the central and local governments that features well-defined powers and responsibilities and the appropriate allocation of resources, with an optimum balance between regions.

Han said China needs to clearly delineate the fiscal powers and responsibilities between the central and local governments. The central government will hold more fiscal powers as appropriate and raise the proportion of central government expenditure accordingly.

Meanwhile, efforts will be made to optimize division of revenue between the central and local governments. Specifically, China will place more fiscal resources at the disposal of local governments, by expanding the sources of tax revenue at the local level and grant greater authority for tax management to local governments as appropriate.

Also, the country will step up the improvement of its transfer payment system by overhauling special transfer payments and increasing the scale of general transfer payments.

"These will help ensure that the fiscal resources of prefecture and county-level governments are commensurate with their powers," said Han.

Previously, China had outlined a slew of measures to deepen fiscal and tax system reforms in the resolution that was adopted during the third plenary session of the 20th Central Committee of the Communist Party of China in July. Han's article meant to delve into the spirit of those fiscal and tax reform measures.

In another development, the Ministry of Finance and five other government departments jointly issued trial measures for municipal infrastructure and asset management on Monday, which emphasized that illegal and irregular borrowing for municipal infrastructure and assets that have no or insufficient income must be prohibited, and that hidden debts must not be increased.

Zhu Guangyao, former vice-minister of finance, said in an earlier interview that China is moving in the right direction to solve problems underpinning financial strains in some regions, and it is of great significance for the country to carry out necessary measures to achieve such goals.

Zhu said the central government has to take on more responsibility, while reducing some responsibility on local governments by transferring more fiscal resources to them.

Meanwhile, Zhu noted that the scale of financial transfer payments in China exceeded 10 trillion yuan ($1.4 trillion) last year, or about half of China's fiscal revenue.

Such a large amount of transfer payments necessitate reforms to increase direct financial strength for local governments while increasing central government responsibility accordingly, said Zhu.

Zhu also stressed the significant role that economic growth plays in improving financial conditions of local governments.

Yang Zhiyong, director of the Center for Public Finance and Taxation Research, which is part of the Chinese Academy of Social Sciences, said the third plenary session highlighted that there are many measures to place more fiscal resources at the disposal of local governments, like expanding the sources of tax revenue at the local level.

Luo Zhiheng, chief economist at Yuekai Securities, said the outlined reform measures will help alleviate the financial difficulties currently faced by most local governments.

Luo said he expects the reforms to increase tax sources for local governments and thereby strengthen their fiscal sustainability.