China's Fiscal System: A Work in Progress

Abstract

We argue in this paper that unless China begins to tackle more systematically the serious problems that have emerged in the finances of its various levels of sub-national government the problems to which the present unsatisfactory system give rise will over time increasingly distort resource allocation, increase distributional tensions, and slow down the impressive recent growth of the Chinese economy. The evidence available is generally consistent with this pessimistic reading. China's fiscal future thus rests to some extent on reforms to key aspects of its fiscal system especially its intergovernmental finances. Given the scale and scope of China's underlying public finance problems, the 'reactive gradualism' evidenced in recent ad hoc reforms to this or that piece of the fiscal system has, we suggest, run its course.

Keywords: China, intergovernmental finance, taxation, budget

JEL Classification: H11, H70, O53, P21