IMF says China’s financial system needs an overhaul

16/04/2018

China’s sprawling local government financing system needs to be reformed to increase consumption and promote economic rebalancing, IMF says

 

The IMF also suggested that China centralize pensions and unemployment insurance, boost funding for urban areas to help pay for migrants, increase borrowing quotas for local governments and bring all spending onto the budget, and create recurring property taxes and adding local surcharges to national individual income taxes.

China’s fiscal system is the world’s most decentralized, with local bodies responsible for 85% of government spending, the fund said in a report, citing the breadth across 31 provincial governments, 334 prefectures, 2,850 counties, 40,000 townships and 900,000 informal village jurisdictions. Including off-budget spending by local government financing vehicles brings the ratio up to 89% of all public expenditures.

 

2014 budget law aimed to improve budgeting and increase transparency and accountability in local government finances

 

“These reforms will allow China’s government to improve social safety nets and better protect citizens from adverse economic and health shocks,” Philippe Wingender, a tax policy economist wrote in a paper released Saturday.

A 2014 budget law aimed to improve budgeting and increase transparency and accountability in local government finances by requiring multi-year spending plans and setting conditions for managing annual deficits and surpluses. But it doesn’t address the misalignment of spending and taxing powers and the large imbalance across levels of government that’s prevailed since the last major fiscal reform in 1994, Wingender said.

 

Personal income taxes contribute around 5% of total revenue, significantly less than the 25% average for Organisation for Economic Cooperation & Development (OECD) nations

 

“Efforts to improve government borrowing and contain fiscal risks will only succeed if supported by reforms to reduce unfunded mandates for sub-national governments,” he said. Counties have the largest fiscal mandate among all levels of government, with spending equal to 9% of GDP, according to the report.

Almost 50% of total tax revenues come from VAT and corporate income tax, a high level compared with advanced economies. Meanwhile, personal income taxes contribute around 5% of total revenue, significantly less than the 25% average for Organisation for Economic Cooperation & Development (OECD) nations.

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