|
The following is the Executive Summary of the OECD publication Challenges for China's Public Spending: Toward Greatere Effectiveness and Equity.
China’s evolution from a centrally planned to a market-based economy has led to major transformations of its public expenditure policies. Significant progress has been made in raising spending on infrastructure to a level more in line with China’s development needs and in improving mechanisms for expenditure budgeting and planning. Nevertheless, significant problems remain.
Spending needs to be better defined and more transparent
China’s officially reported spending figures reflect only about three-quarters of total government spending. Extra-budgetary spending, social security outlays and central government bond financing of local projects are not part of the official budget. Notwithstanding recent reforms, the government remains overly exposed to extra-budget and off-budget activities, which make public expenditures difficult to plan and control and which impair their accountability and transparency. Contingent liabilities have been a major source of unplanned spending and pose perhaps the greatest risk to the controllability of future expenditure.
China’s uneven fiscal decentralisation has been an important impediment to the effectiveness of its public spending. Expenditures are considerably more decentralised than revenues and local governments have very little control over spending or tax policies. The result is the delegation of responsibilities to lower government levels without corresponding resources. Such unfunded expenditure mandates coupled with limited sub-national autonomy over revenues encourage sub-national governments to resort to off-budget financing and accumulate debt, which is prohibited by law.
China’s government has been making strong efforts to improve the planning, formulation, and implementation of public spending. Experiments with output and outcome targets have started and a series of reforms have been adopted in the area of budget management and planning that are aimed at improving the effectiveness of spending. However much remains to be done. Benchmarks for spending efficiency and effectiveness evaluation have not been fully harmonised across the country. The decision making authority over capital, personnel and current expenditures lies with three different organisations and the capital budget is not anchored into a medium-term framework. The analysis in this report suggests the following guidelines for further reforms to increase transparency and improve the effectiveness of China’s public expenditure policies.
-
Continue efforts to bring expenditures now off budget onto the budget as part of broader efforts to subject all expenditures to more rigorous formulation, implementation, and accountability.
-
Improve transparency by reforming accounting systems for expenditures along functional lines, using international standards as a guide, so that amounts spent on key social, development, and other needs can be clearly determined and assessed.
-
Design clear expenditure assignments for each government level and make sure that there are funds available to finance these assignments.
-
Increase efficiency through more standardised benchmarks for evaluation and more market-based procurement.
Expenditure needs to be allocated more efficiently
The allocation of public spending appears out of line with China’s development needs and goals in at least three areas: public spending on education, science, and health are still low by international standards.
The analysis in this report suggests the following guidelines for further reforms to improve the effectiveness of China’s public expenditure policies.
-
Improve allocative efficiency of public expenditures by raising spending on education, health, science, and other social/development needs, as a share of overall spending and relative to GDP, to levels more in line with China’s development objectives.
-
Reduce unnecessary spending on public administration and improve efficiency of public infrastructure investment, in part to better control future growth in these areas.
Spending inequalities should be lessened
Fiscal relations among different government levels in China are characterised by a comparatively high but also uneven degree of decentralisation. This system decentralises spending decisions much more than tax revenues and gives little freedom for localities to set tax rates. As a result, central and provincial governments have had to spend large amounts on transfers to help make up for disparities in revenues across their sub-jurisdictions. However the transfers have not been able to prevent the emergence of marked variations in public spending across the country. The fiscal system also has allowed the development of substantial gaps between the expenditure responsibilities of sub-national governments and their resources. Such gaps have been an important factor behind the growing resort to off-budget funds and illicit borrowing by local governments, and are partly responsible for the relatively low level of public outlays on education and other important development needs.
Financing shortfalls of sub-national governments, especially at the lowest levels, are further aggravated by inefficiencies inherent in the system. An excessive number of layers in the administrative system constitutes a burden on subnational finances and the small size of many grass-root level governments hinders the exploitation of economies of scale.
To increase the potential efficiency gains from the decentralised provision of public goods and services, the inter-governmental fiscal system needs to take better account of differences in resources across the country.
-
Reform the systems of transfers between the central government and provinces and provide more equity-oriented guidelines for sub-provincial transfer system design. Increase transfers to provinces, particularly in the central region, where intra-provincial disparities are low, while improving distribution of fiscal resources within provinces where disparities are high, particularly in the western region.
-
Improve accountability of sub-national governments by establishing more explicit criteria for performance in key areas such as education. Consideration might also be given to allowing local governments some greater discretion over the rates of certain taxes.
-
Increase efficiency by simplifying the administrative system and by better exploitation of economies of scale through joint provision of public goods and services.
-------------------------------------------------------
Return to the Challenges for China's Public Spending homepage
To access the full version of Challenges for China's Public Spending :
-
Readers at subscribing institutions can go to SourceOECD, our online library.
-
Non-subscribers can purchase the PDF e-book and/or printed book at our Online Bookshop.
-
Government officials can go to OLISnet's Publication Locator.
-
For further information please contact the Margit Molnar at the OECD Economics Department at webmaster@oecd.org.
_______________________
|
