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Reform of the intergovernmental transfer system in China (English)

In China, most of the service delivery responsibilities are assigned to the subnational governments. Yet for reasons of efficiency in tax collection and administration, the central government collects revenues far in excess of its expenditure needs. In 2003 the central government collected 70 percent of consolidated revenues but accounted for only 30 percent of consolidated expenditures. The initial fiscal surplus of the central government enables it to use its spending power to provide financing to subnational jurisdictions for the achievement of national objectives and to influence local priorities. This paper examines the incentives associated with the design of such transfers and their implications for the efficiency and equity of public service provision and accountable local governance in China. The paper argues that the existing design of such transfers is not consistent with efficiency and equity considerations. It further undermines local autonomy without enhancing local accountability while creating incentives for imprudent fiscal management. Its main limitations include a complex and opaque system, a piecemeal approach to gap filling, lack of consistency of design with objectives, focus on input controls without regard for output accountability, incentives to support an antiquated management paradigm, a one-size-fits-all approach to local financing, and lack of transparency and regulatory framework for the intergovernmental transfer system. The paper makes specific suggestions on a reform of this system to overcome these limitations and on better use of fiscal transfers to create responsive, responsible, equitable, and accountable local governance in China.

Details

  • Author

    Shah,Anwar M., Shen,Chunli

  • Document Date

    2006/12/01

  • Document Type

    Policy Research Working Paper

  • Report Number

    WPS4100

  • Volume No

    1

  • Total Volume(s)

    1

  • Country

    China,

  • Region

    East Asia and Pacific,

  • Disclosure Date

    2010/07/01

  • Disclosure Status

    Disclosed

  • Doc Name

    Reform of the intergovernmental transfer system in China

  • Keywords

    explicit standard of equalization;system of equalization transfer;modes of service delivery;fiscal capacity equalization program;enterprise income tax revenue;Agricultural Bank of China;universal access to primary;Public Sector Governance;quality of public service;tax rebate;ad hoc grant;representative tax system;central transfer;personal income tax;grant program;fiscal gap;national minimum standard;fiscal system;general revenue sharing;credit market access;expenditure need equalization;central tax administration;access to borrowing;source of revenue;accountability for results;fiscal equalization program;emerging market economy;provincial revenue;consumption tax revenue;formula based transfer;package of policy;public management paradigm;civil service wage;subnational government deficit;flat rate charge;fiscal transfer;excise tax revenue;improving service delivery;public welfare fund;public finance literature;per capita recipient;service delivery framework;income tax collection;source of financing;diversity of culture;intergovernmental fiscal transfer;service delivery responsibility;local service provision;access to information;balanced regional development;rural road construction;school age population;per capita revenue;fiscal transfer system;income tax base;public service provision;sum of money;effective tax rate;earmarked grant;fiscal capacities;tax share;increasing wage;transfer program;purpose of grant;grant design;minority region;Tax Reform;equalization grant;intergovernmental transfer;vat revenue;fiscal equity;fiscal disparity;township government;equalization system;negative correlation;fiscal need;provincial expenditure;merit good;wage increase;central policy;perverse incentives;special grant;capital grant;grant funds;potential yield;population size;shared tax;allocation criterion;prefecture governments;local priority;raise revenues;fiscal arrangement;Transition economies;sunset clause;fiscal efficiency;econometric approach;fiscal responsibility;transition economy;metropolitan area;enterprise tax;expenditure system;national gas;rural area;offshore oil;industrial country;commercial enterprise;benefit spillover;vehicle tax;capital transfer;gap filling;budget execution;executive order;accountability framework;reasonable assurance;construction tax;legislative approval;cost efficiency;fiscal discipline;budget committee;publishing house;university press;public policy;business tax;policy study;legal framework;funds allocation;data availability;central regions;bonus system;subsidy system;remote area;Property tax;local resident;taxable salary;legislative framework;deliberative body;fiscal transparency;fiscal risk;fiscal prudence;equity objective;national fiscal;deficit grant;national population;objective criterion;uniform taxation;provincial autonomy;formal income;provincial flexibility;fiscal management;greater access;central administration;adverse consequence;tax effort;equalization standard;tax choice;share offer;subnational deficit;higher deficit;fiscal effort;independent budget;teaching hospitals;conditional transfer;policy risk;central base;block grant;taxable capacity;government choice;lower tax;government efficiency;subnational levels;unemployment rate;equalizing impact;redistributive impact;remote region;fiscal health;fiscal surplus;subnational jurisdiction;middle school;grant allocation;budgetary expenditure;wage policy;agricultural tax;minority areas;base year;program account;support infrastructure;natural catastrophe;coastal provinces;local autonomy;discretionary transfer;hierarchical relationship;transfer design;fiscal resource;regional disparity;capital construction;traditional model;rail transportation;program leader;collect revenue;black box;administrative supervision;national tax;productive tax;local ownership;fiscal burden;fuel expenditure;Public Services;explicit equalization;rural public;employment creation;wage expenditure;fiscal deficiency;tax assignment;education grant;state council;Ethnic Minorities

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Citation

Shah,Anwar M. Shen,Chunli

Reform of the intergovernmental transfer system in China (English). Policy, Research working paper ; no. WPS 4100 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/192801468213920053/Reform-of-the-intergovernmental-transfer-system-in-China