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People's Republic of China

Challenges for China's Public Spending: Toward greater effectiveness and equity

 

Executive summary

Public spending is one of the Chinese government's key tools to shape national development.  Currently, public expenditure policies are undergoing a major transformation to meet the changing requirements of the market economy. However, major challenges remain: to develop more effective institutions and practices for planning, implementing and controlling spending; to improve the allocation of spending so that it better meets China's needs; and to reform the relations among levels of government.

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Introduction

Chapter 1. Government Spending is Bigger than it Looks: the Need for Greater Transparency and Control
China’s public expenditure policies have been rapidly evolving but still bear important vestiges from the central planning era. There is much public spending carried outside of the formal budget, including off-budget and often illegal outlays by local governments and spending associated with contingent liabilities of the state banks and other activities. After a long decline relative to GDP through the first half of the 1990s, public expenditures have risen quite rapidly over the past ten years although their growth has recently begun to moderate. There are reasons to believe that spending growth may moderate further in the medium term, but off-budget spending and contingent liabilities pose significant uncertainties to the outlook. Public expenditures are also highly decentralised but revenues are noticeably less decentralised and the system of fiscal transfers only partly makes up for the resulting gaps between mandated spending and revenues at the sub-national level. The resulting strains have encouraged the growth of illicit local government debt and engendered other problems. Reforms to improve the effectiveness with which public spending is planned and implemented have been gaining momentum but in most cases are still at an early stage.

Chapter 2. Where the Money is Going: A Reorientation Towards Human Development is Needed
Capital spending and public administration take a large and, until recently, increasing share of China’s overall public spending. In contrast, the portion devoted to certain human capital and other development needs such as education, health, and science and technology appear somewhat low, both in relation to international standards and China’s own goals. Education and health spending, which are largely the responsibility of local governments, are also highly unevenly distributed on a per-capita basis across provinces and between rural and urban areas within provinces. A number of considerations, including the opening of infrastructure projects to private capital and inefficiencies in public administration suggest that there is scope to reduce the share of public spending devoted to these activities in the future and to make way for increased spending on human and social development.

Chapter 3. Getting the Spending to Where it is Most Needed: Reforming Relations Among Government Levels
The uneven decentralisation of the fiscal system in China along with disparities in per-capita tax bases across regions means that China’s subnational governments typically lack sufficient tax revenues to finance their expenditure responsibilities. The large-scale system of transfers only partly makes up for these differences, resulting in significant gaps between expenditure responsibilities and fiscal resources for many provincial and local governments. These gaps are an important factor behind the substantial disparities in per-capita government spending across provinces and between rural and urban areas. Estimates suggest that the gaps are largest for the central and western provinces and at the county level. To address these gaps, the mechanisms for allocating transfers, both between the central government and provinces and within provinces, will need to be reformed to better take account of actual needs. At the same time, measures that are now being implemented to improve the accountability of local governments for expenditure outcomes could be further developed and steps taken to increase the efficiency of sub-national governments’ administration.

Conclusions and recommendations

Annex A. Case Studies of Local Government Finances

Annex B. Statistical Tables

Annex C. The Estimation of Financing Gaps

Annex D. The Classification of Expenditures

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