Distributional Consequences of Reforming Local Public Finance in China

TLDR

Since the 1960s, China has repeatedly restructured central‑local budgetary arrangements to balance central control with local autonomy, driven by a declining tax share of GNP and a push for greater decentralization of planning, which devolved expenditure responsibilities and financial authority to local governments. Fiscal decentralization has tightened budget constraints for locally controlled enterprises and agencies, promoted fiscal discipline by tying expenditures to revenue growth, and stimulated entrepreneurial activity among local bureaucrats, thereby accelerating rural industrial expansion.

Abstract

Central-local budgetary arrangements have undergone numerous changes since the 1960s as the Chinese government in its quest for modernization has sought to balance the needs of central control and local autonomy. During the reform period, the falling tax share of GNP and a commitment to greater decentralization of the planning system led to major changes in the public finance system that have devolved expenditure responsibilities and financial authority to local governments. Fiscal decentralization has been credited with hardening budget constraints for local publicly controlled enterprises and government agencies. New budgetary relations have instilled fiscal discipline, allowing local governments to disburse more expenditures only if they generated more revenues. These reforms have helped unleash the entrepreneurial spirit of local bureaucrats, fuelling the rapid growth of rural industry.