Transcript The fiscal situation and reform in China I

Current Fiscal Situation and
Reform in China
YUAN Guangrui
Deputy Director-General
Administrative Department
Ministry of Finance, PRC
May 26, 2005
1
Current Fiscal Situation and
Reform in China
Mechanism of stably increased fiscal
income has initially been formed
2. Building up of public finance system
has gained substantial progress
3. The macro-economy-management effect of
financial policy is evidently
strengthened.
4. Next step of the fiscal reform
1.
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I.
System of tax distribution
in fiscal mechanism
The
evolution
distribution
of
system
of
tax
The fiscal management system of traditional
plan economy: “centralized revenue collection
and centralized fiscal transfers”.
 China began the reform in fiscal contract
system during the economic transitional
period.
 China carried on tax assignment system and
different-level management system which are
universally approved since 1994
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Different-level management system whereby tax revenues
are shared by central and local authorities
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Clarification of expending responsibility between the
central and the local
Central finance mainly takes responsibility for the costs
of national security, diplomacy and central government
operation, regulates the structure of national economy,
coordinates local development, carries on the necessary
expense of macro-control, and social development
expense controlled by the central.
Local finance mainly takes responsibility for the
expense needed by the local government operation and
cost of local economic and social development.
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 Separate
the central revenue from the
local revenue
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The central fixed revenue includes: tariff, valueadded tax from import, consumption tax, income tax
from the central enterprises and the non-bank
financial enterprises, and the profit tax from the
central enterprises.
The local fixed income includes: business tax, income
tax payable and profit tax from the local enterprises,
individual income tax, tenure tax payable, and
direction-adjustment tax of fixed capital investment.
The income shared by the central and the local:
value-added tax, resource tax, and stock-exchange
stamp tax.
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II.
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System of fiscal transfer payment in
governments
The tax assignment system in 1995\4 regulated the amount
and form of fiscal transfer payment in governments, and
emphasized the build of tax-return system (some tax
revenue collected by the central government has been
transferred back to local)
Since 1995, system of fiscal transfer payment in
transitional period was built, and standard concept of
fiscal income and outcome was applied.
Since 2000, central government set transfer payment in
minority areas in order to settle special problems there
Since 2002, transfer payment in transitional period was
renamed as general transfer payment.
At present, a kind of relatively standard innergovernment transfer payment has been formed, including
tax return, financial and special transfer payment
targeted equality and balance.
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III.
Reform of tax system
Important reform of tax system in 1994

A new turnover tax system which takes valueadded tax as its core with consumption and sales
tax as its supplement has been established
 Income tax payable of state-owned enterprises is
unified
 A unified individual income tax is established
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Other Tax Reforms
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the scope of resources tax was expanded, and its tax
burden is adjusted. The salt tax was included in resources
tax.
VAT is levied on the use of land, to control the margin
profit of the real estate sales.
Some minor taxes were stopped, e.g. taxes on market
trading, cattle trading, special tax on the use of oil, tax on
bonus and salary adjustment.
Special consumption tax was included in consumption tax
categories, and the administration of the taxes on livestock
and banquet was delegated.
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Efforts are continued to improve tax
system
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Individual income tax on personal deposit interests was resumed.
The tax for adjusting the direction of fixed-asset investment was
stopped temporarily.
The business tax rate for the finance and insurance sector was
reduced from 8 percent to 5 percent in three years.
After a few reductions, the stamp tax rate on stock exchange
transactions was cut down to 1‰
The tax on automobile purchase replaced the fee on such purchase.
The tax and fee reform in rural areas were carried on, and the
agricultural tax would be scrapped
Tariff rate continued to reduce to fulfill China’s WTO
commitments.
The export rebate system was reformed last year, with the rebate
rate cut down by 3 percentage points.
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Current Fiscal Situation and
Reform in China
1.
2.
3.
4.
Mechanism of stably increased
fiscal income has initially formed
Build up of public finance system
has made substantial strides
Fiscal policy has been effective
in term of macro-control.
Next step of the fiscal reform
10
I.
Unit budget-making continued to be
reformed
Unit budget-making
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The reform of unit budget-making was started
in 1999.
In 2000, all central units made their unit
budget, which included basic spending budget
and project spending budget. 4 unit budgets
were selected and reviewed by the National
People’s Congress.
In 2003, the pilot reform on basic spending
and “fixed number of person and fixed quota”
system was expanded to 118 secondary quasigovernment agencies。
In 2004, 5 central units were selected for the
pilot reform of fixed quota of materials
expenditure, and the time for budget-making
was extended to 8 months.
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The reform of category of government income
and spending
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In 2001, the category of budgetary spending was improved
according to economic classification.
In 2002, the 12 categories of budgetary spending were
increased to 44 categories.
In 2003, The plan for Reform of Category of Government
Income and Spending was completed, and the new system
consisted of income categories, functional spending
categories and economic spending categories.
In 2004, top categories and items under functional
spending categories were adjusted to reflect the functional
activities of the government agencies in a more detailed
manner. State Development Planning Commission,
Ministry of Commerce，Ministry of Water Resources，
Ministry of Science and Technology made their budget of
12
2004 using the new categories.
Reforming the administration of “separately
managing the revenue and expenditure”
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In 2002, 15 central units were selected for
pilot reform of the collection of non-tax
revenue. By the end of 2003, 35 central units
and 26 provinces had implemented the pilot
reform.
In 2004, more than 7 central units joined the
pilot reform, and 62 fees collected by 26
units were included in the budget management.
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II.
The reform of centralized treasury revenue
and payment progressed steadily
The reform of centralized treasury
payment
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The reform of centralized treasury payment was
started in 2000. by the end of 2003, 80
central government agencies had joined the
reform, and in 2004 60 more joined.
By the end of 2004, 140 out of 160 central
government budget-making units and more than
2600 local ones joined the reform. Over RMB
250 billion on budget were involved in this
reform.
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The reform of treasury income management
From 2002, 35 central government agencies
joined the reform by three steps, whose nontax income is transferred directly to the
fiscal account.
 By the end of 2004, 47 out of 60 central
government agencies who has non-tax income had
joined the reform.
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Advancing reform in local governments
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30 provinces, over 1500 provincial government
agencies and over 6000 lower level agencies have
joined the reform of centralized treasury payment.
 Over 150 local government agencies (lower than
provincial level) joined the reform of centralized
treasury payment.
 10 provinces are carrying out their reforms on
non-tax revenue.
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III.
Deepening reform on government
procurement system
The government
expanded rapidly
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procurement
system
in 1996, the pilot reform of government
procurement system was started in some
provinces.
The promulgation of Law of Government
Procurement on 1 Jan, 2003 marked the full
implementation of the government procurement
system.
The government procurement system now covers
county and municipal governments.
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The scope and amount of government
procurement increased
The scope of government procurement
expanded
from
commodities
to
construction projects and services.
 The amount also increased, from RMB 13
billion in 1999, RMB 65.3 billion in
2001, RMB 150 billion in 2003, to over
RMB 200 billion in 2004.
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More healthy management of government
procurement
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Execution is separated from the management
system of government procurement. By the end of
2004, 26 out of 36 provinces and cities in plan
had had separated execution bodies from the
management bodies. Such separation plans are
being studied and outlined in other local
governments.
The procurements are more transparent and fair.
In 2004, more than 60 percent of the procurement
was achieved through open bidding, and over 70
percent of all procurements were centralized
ones. Spending was saved by about 10 percent in
doing so.
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IV.
The fiscal structural reform
progressed steadily
The function of public finance was adjusted.
Direct investments in the competitive
sectors were reduced, and spending in the
public sectors were secured.
 The structure of spending was optimized.
Spending on public security, technology
advancement, education, agriculture and
social welfare were increased. Less and less
public finance is involved in the fields of
manufacture or business, reflecting the
characteristic of public finance.
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Current Fiscal Situation and
Reform in China
1.
2.
3.
4.
Mechanism of stably increased
fiscal income has initially formed
Build up of public finance system
has made substantial strides
Fiscal policy has been effective
in term of macro-control.
Next step of the fiscal reform
21
I. From1993 to 1997: Moderately
tight fiscal policy
The excessive economic growth in 1993
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Excessive monetary supply with financial instability: From January
to June 23, the net issuance of RMB amounted to 58.5 billion, an
increase of 53.2 billion on year ago.
Both investment and consumption boosted: from Jan to May,
investment by SOE in fixed-asset increased by 69.3 percent on year
ago; the banks’ cash disbursement for personal remuneration and
other personal businesses increased by 36.4 percent; the
administrative units’ overhead cost in cash increased by 89.4 percent.
These indicators all exceeded the economic growth by far.
More constraints caused by lack of infrastructures and industrial
production: the railways then was only able to meet 30 percent to 40
percent of the total need for railway transportation.; the price of steel,
cement and timber hiked due to excessive demand.
Inflation accelerated: from Oct last year, the growth of consumer
price increased on a monthly basis, exceeding 10 percent in March
and reaching 12.5 percent in May. In the first five months, the raw
material price index increased by 43 percent.
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Moderately tight fiscal policy
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Holding down the fiscal deficit by moderately cutting down the
spending, controlling investment in fixed asset and the
purchasing power of groups.
To reform the tax system, tax rates and structures were adjusted,
and the tax deductions and exemptions were under strictly
control, and the expired preferential tax policies were
terminated without extensions.
Divided tax collection system was implemented, to increase tax
income.
A tighter fiscal regulation and administration, esp. on the fund
out of budget.
Supporting the reform of exchange rate, implementing a
regulated, single floating exchange rate based on market
demand. Improving the export rebate system to boost export.
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Moderately tight fiscal policy effective
A “soft landing” of the national economy in
1996, a 9.6 percent GDP growth, retail price
index up by 6.1 percent.
 A 8.8 percent GDP growth in 1997, retail price
index up by 0.8 percent, a lower price growth
rate than the economic growth rate as expected
in the Ninth Five Year Plan.
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II. Pro-Active Fiscal Policy Since 1998
In 1998, the Chinese economy was affected by
the Asian financial crisis
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The increase of outside demand was slowing down: In the
first quarter of 1998, the exports increased 12.8%. Since
then, the speed of increasing is slowing down. The increase
in April, May and June is 7.9% ， -1.5% and 1.6%
respectively. The increase in the first half of the year was
only 7.6%，falling 18.6% than the same period last year.
The speed of economic growth was slowing down: both the
consumer demand and invest demand were all sluggish, the
GDP growth of the first half year was 7%, falling 2.5% than
the same period last year.
Trend of deflation ： the CPI has been negative since
October, 1997. In the first half year in 1998, the CPI was
falling 2.1% than the same period last year.
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proactive Fiscal Policy Measures
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Issuance of long-term construction treasury bonds, and pushing
up the social investment : from 1998 to 2004, the accumulated
issuance mount was 910 billion RMB，mainly invested to
infrastructure and technical innovation. In 2003, the investment
from the private sector was stimulated successfully.
 Adjusting the tax policy, and pushing up the demand：For the
domestic equipments investment in the technical innovation
projects according with the industrial policy, 40% of the
investment domestic equipment may be credited from the
annual increased parts of the enterprise income tax. To
encourage the foreign and domestic investment, imported
equipments may be exempted from custom tax and value-added
tax . The fixed assets investment direction tax was abolished.
The individual income tax of saving deposit interest was
resumed, and the tax refund rate for export was increased
several times.
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Adjusting income distribution policy, and improving the consumers
expectation：adjusting the wages of employees in the government agencies
four times, setting up allowance system for those working in the poor
region, and doubling the bonus by the end of each year for employees in
the government agencies. The average wages per month for employees in
public sector almost double. At the same time, the social security payout
also increased. In 1998, the payout for those unemployment used for their
basic living expenditure, endowment insurance subsidy, and low income
subsidy were 12.3 billion RMB. This figure increased as 107.86 billion
RMB in 2004, 7.8 times as the year before.
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Formalizing the administrative charge system, lessening the social burden:
from 1998 to 2003, there were 1805 administrative charge items were
cancelled, thus the social burden were lessened 141.7 billion RMB. At the
same time, the reform of rural tax and charge was also deepening and
formalizing. The burden of farmers lessened for the farmers was above
30%.
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Great Achievements of proactive
fiscal policy
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The economic growth was pulled up 1 to 2
percent per year. This made the GDP growth
stabilize between 7％to 9％ each year.
 The Chinese economy was walking out of the
deflation shadow. In 2003, the CPI increased
1.2% than last year.
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Since the second half year in 2003, the has
been over-heating in some area
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The supply and demand of food was straining
Sharp increase of fixed assets investment
Too much increase of loan
Supply of coal, electricity and oil was scarce
The price was keeping upward
Bubble showed in assets prices
Huge deficit emerged in foreign trade
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In 2004, the extent and emphasis of active
fiscal policy were adjusted
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the support of “agriculture, rural areas and farmers ” was
increased
The implementation of “two tax reductions, and three subsidies ”
spent the central government 45 billion RMB
 The expenditure of controlling bird flu was 8.48 hundreds million
RMB. A series of supporting policies relating to tax and charges
reduction, funds and subsidies were implemented.
 Government bonds used for agriculture was 38 billion RMB, accounts
for 34.5% in the total increment of government bonds this year.
 Increasing the agricultural integrated developing expenditure,
implementing the lowest purchasing price for food. The expenditure
for education, sanitation, and culture was also increased, mainly being
used in rural area. Keeping the price of agricultural materials stable,
and supporting the training for rural labor migration.
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Holding the direction and strength of fiscal
investments appropriately
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According to the principle of “five balanced aspects ”(五
个统筹), the expenditure structure of government bonds
was adjusted.
The payout progress of government bonds and
government investment was slowing down. This year the
payment was 45.69 billion RMB.
The payout structure of land transfer revenue was
adjusted. Some of the land transfer revenue was used to
develop the agricultural land. This policy controlled the
expansion speed of cities construction effectively.
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 Reform
the export tax refund system
steadily
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The 243.6 billion RMB ,that government owe
for tax refund , has been almost paid up
 Ensuring the timely pay of new refund tax.
The export was accelerated rapidly.
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Increasing the support for the employment,
social security, and public sanitation
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Increasing the re-employment subsidies of 2. 225
billion RMB from the central budget
The subsidies of basic living expenditures for
unemployment were 14.4 billion RMB
Special transfer payment for endowment insurance was
52.4 billion RMB
Supporting the pilot reform of social security system of
cities and towns in Jilin and Heilongjiang province.
Supporting the building of new rural cooperation
medical and remedy system
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Support the reform of state-owned
enterprises actively
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Arranging subsidies for bankruptcy and closedown
Supporting the pilot reform of separate the social
function from the enterprises, in China National
Petroleum Corporation (CNPC),, Sinopec, and
Dongfeng automobile company.
Supporting national commercial banks in their the
financial restructuring and IPO , including Bank of
China, China Construction Bank, and Bank of
Communication.
Pilot reform of value-added tax in north-east region
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III. Implementation of prudential fiscal policy
since 2005
Great changes have taken place in Chinese economy
 the independence economic growth mechanism was
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formed primarily
The function of market mechanism was strengthening
obviously: now the mechanism of supply and demand, price
mechanism, and competition mechanism were the basic
elements in the resource allocation. The private economy was
the main force to push the economic growth.
The pace of urbanization was accelerated: in recent years, the
people in Chinese town increased 1.4% per year. In 2003, the
urbanization rate was 40.5%，showing that China was in the
process of the important period of accelerated urbanization.
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The upgrade of consumer structure was accelerating: In
2003, GDP per capita in China was 1090 US dollars. The
consumer structure was in the stage of transforming from
“eating, wearing and using” to “living, traveling and
touring”. The trend of heavy chemical industry was also
emerging.
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Developing the opening economy further: In 2004, the
reliance of foreign trade was about 70%. China has
become the third largest trade country in the world. At the
same time, as the main destination of FDI, the china
outbound direct investment was also increased rapidly.
36
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The economic growth entered the upward
stage of a new cycle
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The economic growth was close to the potential level: In 2003, the
GDP growth rate was 9.3%. In 2004, the growth rate was 9.5%.
The emergence of bottle-neck constrain or resource constrain
showed that, the GDP growth has been close to the potential level.
The price was upward: In 2003, CPI and CRI increased 1.2% and 0.1% respectively than last year. In 2004, the two figures were
3.9% and 2.8% respectively.
The increase of unemployment rate was slowing down: In 2003,
the employment in cities increased 8.59 million, and the registered
unemployment rate in cities was 4.3%. In 2004, the abovementioned two figures were 9.8 million and 4.2% respectively. The
unemployment rate decreased 0.1 percent than the year before.
Surplus of balance of payment: In 2003, the foreign trade surplus
was 25.5 billion US dollars. By the end of this year, the foreign
reserves in China were 403.3 billion US dollars. In 2004, the
above-mentioned two figures were 32 billion and 609.9 billion US
dollars respectively.
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37
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Emergence of serious problems in economic
development
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Gap enlarged in the process of development: according to the fact of
unbalanced and disharmony development in China, Chinese government
brought out five balanced aspects, including balancing urban and rural
development, balancing development among regions, balancing economic
and social development, balancing development of man and nature, and
balancing domestic development and opening wider to the outside world
The conflict between economic growth manner and resource constraints
was severe：Chinese GDP in 2003 accounted for 4% of the whole world,
but the resources consumption proportional to the whole world were as
follows: petroleum 7.4%, coal 31%, iron ore 30%, steel 27%, alumina
25%，cement 40%.
The reform of economic system lagged : the changing of government
functioning was inadequate. The government was still involved in the
resource allocation in competition area. The price mechanism in factor
market was imperfect, thus underestimated private cost of investment
seriously. The reform of enterprises lagged behind, and the budget
constraint was still soft. There existed distortion in the enterprises’
operation.
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Basic contents of prudential fiscal policy
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Control of deficits: decreasing the central fiscal deficits appropriately,
keeping the balance of increment, with tightening and
loosing suitably.
Structure adjustments: according to “five balanced
aspects”, adjusting the structure of fiscal expenditure and
government bonds funding payout
Pushing the reform forward: changing the traditional
way of the economic growth, that mainly depends upon
the investment from government bonds funding, and
supporting the reform of economic systems and
innovation of instruction.
Increasing revenue and reducing expenditure:
collecting tax strictly and legally, and ensuring the stable
growth of fiscal revenue. Strictly managing the fiscal
expenditure, and enhancing the efficiency of using fund.
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The fiscal situation and reform
in China
I、The mechanism of stable growth of fiscal
revenue has formed preliminarily
II、The building of public fiscal system
stepping forward effectively
III、The function of macro adjustment of
fiscal policy was strengthening obviously
IV、Basic thoughts of next step reform
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I. Improving the fiscal management of tax
assignment system
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Improving the transfer payment manner, and
increasing the scale of ordinary transfer. Optimizing
the transfer payment structure, and improving the
public service level in undeveloped area, to attain the
goal of getting rich together.
 Improving the local fiscal management of tax
assignment
system, leading the provincial
governments to bear the responsibility of adjusting
and distributing the fiscal resources, and enhancing
the ordinary transfer payment to fundamental
government.
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II. Optimizing the tax system further
Improving the enterprises income tax system
 Checking and formalizing the different tax policy for
domestic and foreign investors, especially the
preferential tax policy to foreign investors. The tax
policy should be unified with no discrimination for
ownership.
 In the process of unifying the enterprises income tax
for domestic and foreign investors, the preferential tax
for the foreign investors now could be retained
temporarily for some time. After tax unifying totally,
some preferential tax policies would be replaced by
industrial preferential policies. In some areas, the
preferential rights could be strengthened.
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Reform of individual income tax system
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Implementing the integrated and classified
personal income tax system steadily. Combining
the main income items into the integrated income,
and adopting the progressive tax rate.
 Adjustment of the tax rate,expenses reduced, tax
exemption ,tax collecting and administration，in
order to bring the function of income distribution
into play, and to minimize the gap of the
individual income.
43
Implementing the
based VAT reform
consumption-
 The production VAT did not reduce fixed assets
investments, thus dual impose existed
 From now on, the production-based VAT would be
changes as consumption-based VAT. There would
be pilot reform in 8 industries in north-east region,
including equipment manufacturing industry. The
reform would be expanded to all-over the country
steadily. The tax included in the price of the new
purchase of equipments would be added to the
reduction item of VAT.
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Improving the consumption tax system
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Enlarging the imposing scope. The products
harmful to the environmental protection, and
some luxury consumption goods should be
imposed.
 According to the economic development and
consumption structure, some products
consumption tax rate with obvious heavy
burden should be decreased. The rates for those
products needed to be adjusted further should be
increased, in order to form a more reasonable tax
rate structure and level.
45
Improving the tariff system
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Fulfilling the promise of entering WTO, the general
custom rate level this year would be 9.9%, compared
with 10.4% last year. The reduction of tariff has almost
been finished.
Studying the property tax

There are many tax for real estate in transaction items in
china now, with fewer tax for the ownership of real
estate and the tax burden is low . It is not good for the
healthy development of real estate. Therefore, it is
necessary to study the reform of property tax, to lead
the housing consumption and adjust the wealth gap
among residents.
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III. Reform of budget management
system
In budget making, the departmental budget system
should be improved further
 Pushing forward the classification reform of
government revenue and expenditure. Formalizing the
classification of revenue, expenditure function, and
expenditure economics, to reflect the budget
arrangement of each responsibility taken by the
governments comprehensively and directly.
 Implementing the performance evaluating system for
fiscal expenditure, and setting up unified and
formalized evaluating rules. Building up performance
evaluating index system, basic information database
of performance budget , and performance budget
system.
47
In the aspects of budget executing, the emphasis should
be focused on reform of exchequer collective buying &
payment system, and the government procurement
system

Integrating all the budget unit into the exchequer collective
buying&payment system. Formalizing the single account system
of exchequer further, studying the way to improve the operation
of the exchequer collective buying and payment.
 Building and improving the dynamic real time supervision
system throughout the country, strengthening the supervision of
the whole process of budget execution. Studying the rule of
managing the exchequer cash, to improve the efficiency of the
operation of exchequer fund.
 Fully implementing the reform of government procurement
system. Through public bidding and asking, the scope and scale
of government procurement could be further enhanced.
Formalizing the procurement procedure and manner, improving
the management of budget planning of procurement.
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