The Summary of the conference speech
The presentation on July 5, 2012, Korea Institute of Local Finance
First, let me express thanks to “Korea Institute of Local Finance” for inviting me to attend this international conference, and also I am very honored to have some exchanges with scholars and experts on local finance in South Korea and who come from Japan and OECD today. I believed that I can get a lot of from this symposium.
Others (In addition), in recent years, I have been making the comparative law study on tax system and regulations, mostly, including the Regions in Northeast Asia, I am also interested in the topic on " The Integration of Northeast Asia Economy ", so from this point of view, I think it is necessary to strengthen exchanges more and more in the future in such areas of public finance and tax Policies and legislations between China, South Korea and Japan.
The title of my presentation today is about “Study on the Issue of the ‘Equalization of Basic Public Service’ Under the Current Financial Law System of China － Focus on the government’s fiscal relations and transfer payment system”.
First, I would like to explain the meaning of word “the equalization of basic public services”, because this word is very popular in China in recent years, and is often striking on annual government work reports and the Chinese Communist Party policies. This word was first proposed on the report of 16th Party's Congress; the report’s name is “China publishes resolution on building of harmonious society”. The main purpose of putting forward this concept is related to solve many economic problems and social problem.
I know a lot of Korean and Japanese economists are very concerned about China's economic development and emerging social issues in the process of economic development.
I have consulted some references such as papers, monographs, statistics and annual report of Chinese government and the Party that was published in recent years, and summarized the main problems of economic and social development that is including the following aspects. It can help us to understand the back ground of the concept of “equalization of basic public services” and “fiscal equalization”.
First, the major economic problems are the problem of supply structure and demand structure, including that the industrial structure is unbalanced, the foundation of agriculture is still weak, development of service industry is lagging, and Industrial development is large but not strong, the growth in the economy was mainly driven by investment and export trade, it resulted the lower consumer demand and insufficient domestic demand, there is a big gap existing between different regions and between urban and rural areas.
These economic problems also have led to some social problems, such as polarization between the rich and the poor, gradually widened gap of enjoyment of public services on health, education, housing, employment, and social security.
The conclusion is that I think the future direction of social development in China can be summarized in one sentence. That is “China will enter a new period of “balanced social development with economic steady increase” instead of “unbalanced growth with rapid economic development”. The future goal and main issues facing to the Chinese government is that "how to change the mode of economic development” and how to develop the social security system for protecting people's livelihood. This is the key to solve above mentioned problems. I think the policy of “the equalization of basic public services” is one way to solve these problems, and the fiscal equalization is one of an important means to realize this goal.
For realizing above mentioned equalization of basic public services and fiscal equalization, we can find some changes in governmental policy in recent years. .for example,
In 2002, it was clearly to put forward the basic functions of the central and local government that is including economic regulation, market supervision, social management and public service. This indicates that the government will no more involve in the competition of the market economy like before, and beginning to focus on providing public services.
In 2005, it was put forward in the government report to build a service-oriented government. It indicates that the administrative concept will be changing from "management-oriented government" to “service-oriented government”. In the same year, the word of “equalization of public service” was firstly appeared in the report of Chinese Communist Party.
In 2006, the concept of “the protection of social fairness and justice” and “equalization of basic public services” was formally written into the announcement of Chinese Communist Party, and “The goal is to promote the coordination of economic and social development, coordinating the development between urban and rural area, promoting employment, education, health care, cultural undertakings, and the development of social security as the most fundamental services (basic public services). Meanwhile, it will improve the fiscal system as support system for government to provide the equalization of basic public service. The focus of fiscal equalization is to increase fiscal transfer payments and to promote the establishment of legal system of transfer payments”.
I have just introduced the some basic matters of the back ground about the “equalization of basic public service”, and her I will explain the content and meaning of this word, It will help us to understand the scope of the function performed by Chinese government.
Since time is limited, so I just give you the policy interpretation. That is as I have mentioned above, it include the employment, education, health care, cultural undertakings, and the development of social security.
The standard of the “equalization” is not clearly provided in the policy, but we can find some general opinions that mean the equality of opportunity for most people to enjoy the public services in different areas, and local governments have equal fiscal ability to provide public services to local residents.
The third part of my presentation today is about “The issues and reasons of non-equalization of basic public service”. These issues can help us to understand in what aspects should be improved on constructing the system of basic public services in China. There are four main issues.
The first one is “The overall low level of public service supply”, although the proportion of expenditure on basic public services is increasing every year, but it is still very low level. For example, in 2011 it is only 41% of total fiscal expenditure, and other fiscal expenditure was used for infrastructure and other investments.
The second problem is a regional non-equalization of basic public services. Normally, China is divided into four regions that is central, western, eastern and northeastern region. For example, in eastern region, such as Shanghai, GuangZhou, the economy is very developed, so there have sufficient financial resources to provide basic public services, but in other regions, the local government doesn’t have sufficient fiscal resources due to backward economic development, so the level of basic public services is very low in these areas.
The third problem is about Non-equalization of basic public services between urban and rural, as we know that there are some characteristics of Urban-rural dual economic structure in China like other developing countries that means the modern industry and the traditional agriculture with backward technology exist side by side in China. For this reason, there is a big gap of economic development between urban and rural areas. In generally, the level of basic public services in urban is higher than in rural areas.
The fourth problem is about “Non-equalization of basic public services between social Subjects”. The major social problems facing to Chinese government is that the big gap of individual's income is widening in recent years due to the non-equalization of distribution of benefits. For this reason, it affected the affordability of very one to pay for basic public services. There are statistical data to show you the change of individual incomes. For example, in 1980, the Gini coefficient is 0.22, and in 2009 it rose to 0.5, that indicate there is a very large gap of individual income in China.
The fourth part of my presentation is “the existing problems on relation of government fiscal allocation and its influence on the equalization of basic public services”.
First issue is “The division of administrative power between Central and Local government”. Now in China, the main legislative basis for controlling the division of administrative power between governments is “The decision of the State Council on the implementation tax sharing fiscal administration system”. According to this regulation,
the administrative affairs that executed separately by the central government is mostly including the (1) public safety matters, (2) national foreign affairs, (3) foreign aid affairs, (4) national investment in infrastructure and construction, (5) construction of public facilities, (6) administrative cost burden of central government agencies, (7) national debt performance etc.
the administrative affairs that executed separately by the local government is mostly including the (1) local investment in infrastructure and construction, (2) construction of local public facilities, (3) administrative cost burden of local government agencies.
The administrative affairs that executed jointly by the central and local government is including (1) the basic education, (2) technological development, (3) the health care, (4) cultural undertakings, (5) social welfare and social relief, (6) employment and social security,(6) aid for local underdeveloped areas, and so on.
The main problem is that the division of administrative power between central and local government are not clearly provided in this regulation. The Delegated affairs from Central to local government are increasing, but the financial sources of local government did not receive full protection from the central government.
The second issue is “allocation of financial powers”. According to above regulation, the existing tax system is that
State tax is including VAT (value added tax), consumption tax, corporate income tax, individual income tax, vehicle purchase tax etc.
local taxes is including the business tax, corporate income tax, individual income tax, resource tax, urban maintenance and construction tax, real estate tax, stamp duty, urban land use tax, additional education Fees.
Taxes shared by the state and local governments is including VAT (in this case, Central government is 75%, local government is 25%), corporate income tax (Central government is 60%, local government is 40%), individual income tax (Central government is 60%, local government is 40%).
The main problem is that the tax power is highly concentrated in the central government, and local governments of underdeveloped areas can not ensure their independent fiscal resources.
For example, the national fiscal revenue in 2010 was 8.308 trillion yuan, the Central government revenue was about 4.247052 trillion yuan, and more than 51% of the total fiscal revenue, Local government revenue was about 4.061 trillion yuan, accounting for 48.9%. National expenditures was 8.9575 trillion yuan, the central fiscal expenditure was about 1.597289 trillion yuan, accounting for 37.6% of the Central government revenue, but local fiscal expenditures was 7.3602 trillion yuan, accounting for 181% of the local government revenue.
Another problem is that Local governments have no t tax legislation power. The last issue is “the relation of allocation on transferring fiscal source- fiscal transfer payment system”. The transfer payments system in China is mainly including two parts that are the general transfer payments and the special transfer payments.
The general transfer payments are designed in order to adjust the fiscal gap between regions, and achieving the equalization of basic public services. Special transfer payments are established for the realization of a specific macro policy and some strategic objectives of undertaking development, or as the grants payment from Central government for some commissioned affairs.
The main problem is that it is not resulting in more transfer payments to the local governments,
The structure of fiscal transfer payment is unreasonable. For example, the proportion of general transfer payments is lower than special transfer payments, so it could not adjust the fiscal gap between underdevelopment regions;
The calculation approach of general transfer payments Is the base method, that did not take full account of regional differences of the natural and geographical conditions, population density, level of socio-economic development, degree of urbanization, per capita GDP, people per capita disposable income.
This leads to that rich regions become richer, and poor regions become poorer.
The conclusion is that I think it is important to establish the local fiscal law system. It should be provided the Local autonomy in Constitutional law, and establishing the local autonomy law system, local fiscal law system, and local tax law system in the future. But I think it is difficult to realize local autonomy in China under current political system. So another way is to formulate the legal system for the adjustment of the central and local fiscal relations like Japan and Korea.