The right way of advancing fiscal system reform

The third plenary session of the 20th Central Committee of the Communist Party of China in July unveiled a series of measures to reform the country's fiscal and tax system, which has pointed the way toward a new round of reforms.

Historically, such reforms have achieved their expected goals and laid the foundation for establishing a modern fiscal system that is in line with Chinese-style modernization.

Standing at a new starting point, the country must break away from traditional thinking and examine the issue in a multidimensional national governance framework.

Fiscal and tax reforms should also be positioned as a key focus for further deepening reforms and serve as a breakthrough point to drive the steady advancement of Chinese-style modernization.

As for the positioning of the new round of fiscal and tax system reform, it has become the foundation of national governance, and has the power to shape the structure of governance and influence major relationships such as between the government and market, government and society, the central government and local authorities, economy and society, efficiency and equity, as well as rights and powers.

Previously, the fiscal and tax system was viewed from an economic dimension, aiming to construct a socialist market economy to promote development.

The new round of reforms is situated within the above multidimensional national governance structure, with the overarching goal of modernizing national governance, preventing and mitigating cyclical risks, and creating certainty in social and economic development.

Fiscal and tax reforms should serve as the vanguard and breakthrough point for further reforms. However, such reforms face challenges in the context of an insufficient momentum in economic recovery.

On the one hand, growth in the nation's disposable financial resources has significantly slowed, while on the other, rigid expenditures arising from various multidimensional objectives in different sectors have rapidly increased, leading to mounting fiscal pressure.

Some functions of the central government have been transferred to local governments and these responsibilities are fragmented and implemented by cities, counties and townships. This makes it difficult to optimize the allocation of fiscal resources, and improving public satisfaction becomes a challenge.

It is also difficult to unify financial authority. The central financial authorities not only hold secondary budget allocation rights for their own levels but also possess implicit authority to bypass local budgets. This keeps local governments in a passive state of always having to "foot the bill" and creates a soft budget constraint, enabling conditions for high-risk financing.

Urbanization has also resulted in population mobility and family migrations, which have brought complexities to transfer payments and the provision of basic public services. For instance, public services are insufficient in areas with net population inflows, while there is an oversupply in areas with net population outflows.

To promote fiscal and tax system reform, the key principle should be to maintain "a lead by the central government, with coordination from fiscal and tax departments".

As fiscal and tax system reform serves to strengthen the foundation of national governance and consolidate regime security, it involves a reallocation and adjustment of risks, responsibilities and financial resources between the central and local governments, as well as various departments.

In this regard, we can draw lessons from the tax and fiscal system reform implemented in 1994 under the tax-sharing system. During that reform, the State Council, China's Cabinet, took the lead directly, leading a reform design group to multiple provinces to gather opinions, engage in discussions and alleviate concerns about the reform.

It was precisely by thorough research and multiparty communication that the reform was advanced without obstruction, laying the foundation for other reforms. Therefore, the principle for advancing this new round of fiscal and tax reform should be innovative, with comprehensive communication in all areas. Issuing reform documents is easy but effectively implementing them is the real challenge.

In advancing the new round of fiscal and tax system reform, fiscal system reform between the central and local governments should be the main body, with budget system reform and tax system reform as the two wings.

The reform should be led by a clear division of powers and responsibilities, coordinated financial resources, and regional balance between the central and local governments.

In addition, the fiscal and tax system reform should be people-centered and focus more on people's mobility, needs and development. This involves further improving equal access to basic public services and the urbanization of rural populations.

Similarly, fiscal and tax reforms should drive a virtuous cycle of innovation in education, technology, talent and industries. This also requires a shift to a people-centered logic, enhancing and unleashing the creative potential of every individual.

To fully implement such reform, more efforts should be made to raise the level of coordination to further enhance the linkage between "responsibilities and funding."

Fiscal and tax system reform is intertwined with reforms in the economic, social and administrative systems, where any change can have far-reaching effects.

It is recommended that a dedicated group for fiscal and tax reform be established at the central level and create a robust coordination mechanism for the reform, thereby strengthening its synergy, coordination and integration.

A comprehensive review of the current policy documents at all levels of government and departments is needed. Policies that do not explicitly involve "fiscal matters" but, in practice, increase the fiscal expenditure responsibility or debt burden on lower-level governments should be suspended.

Based on this, a thorough assessment should be conducted on the potential fiscal expenditure responsibilities of both central and local governments that might arise from various policy documents, as well as their effect.

This will help reduce the uncertainties, unpredictability and hidden fiscal responsibilities imposed on local governments by higher-level policies, laying the foundation for a more reasonable division of responsibilities and expenditure obligations.

Any policy involving fiscal expenditure or tax and fee reductions should also undergo a pre-assessment of fiscal capacity to avoid making decisions beyond budget limits.

Second, it is also necessary to promote the division of powers and expenditure responsibilities between governments based on a "responsibility-sharing system." With increasing uncertainty in economic and social development and the frequent occurrence of public risk events, the expansion of government functions and the continuous adjustment of central-local relations have led to a rapid increase in local government expenditure responsibilities.

The adaptability of the fiscal system, which focuses on revenue division under the tax-sharing system, has decreased, weakening its support for improving national governance efficiency. Therefore, it is imperative to further clarify the fiscal responsibilities of the central and local governments on the expenditure side, shifting the new round of fiscal and tax system reform from a "tax-sharing system" to a "responsibility-sharing system."

To advance fiscal and tax reforms, the first task is to address the heavy debt burden and the systemic risks it entails. First, all existing local government debt should be classified based on the nature of responsibilities and reasonably determine debt ownership. Second, the structure of government debt should be adjusted and the scale of new special bonds be reasonably controlled. Third, budget management of government investment, financing and public asset values should be stronger.

Last but not least, it is also important to enhance the rule of law in the fiscal and tax system to strengthen stability and predictability. This includes efforts to improve the rule of law in budget management, strictly implement the principle of tax and fee legality, and accelerate the rule of law in tax and fee legislation and administration, as well as organize three-year rolling budgets and medium- to long-term budgets.

The writer is president of the Chinese Academy of Fiscal Sciences.

The views don't necessarily reflect those of China Daily.